What is the value of sustainability reporting for companies and stakeholders?

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What is the value of Sustainability

Reporting for companies and

stakeholders?

Student name: Ninh Pham

Student number: 10281746

Date of submission (Final version): 30-06-2014

Qualification: BSc Accountancy & Control Name of institution: University of Amsterdam Name of Supervisor: Conor Clune

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List of tables and figures

Figure 2.1 Growth in reporting since 1993 ... 7

Figure 3.1 Venn diagram addressing Corporate Legitimacy ... 9

Figure 3.2 The information needs of target groups ... 12

Figure 3.3 Three aspects of the Stakeholder Theory ... 17

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Abstract

The purpose of this literature review is to determine the benefits of sustainability reporting and define the value it has for companies and stakeholders. Stakeholders are demanding information other than financial and sustainability reporting has become the standard

approach to answer the stakeholders’ needs. The legitimacy theory and stakeholder theory are discussed and reviewed in conjunction to find out why companies disclose information voluntarily. The theories provide partial explanations, which leads to the conclusion that multiple theories should be used for explaining the motives behind reporting. The value sustainability reporting has for a company is that it provides a way to obtain legitimacy and meet stakeholders’ demands to assure continued existence.

The contribution of this study is to provide a broader and complete view on ways sustainability reporting is able to be beneficial to companies and stakeholders. The benefits of stakeholder engagement and sustainability assurance are included. Prior literature reviews have been mostly limited to one or two of the mentioned subjects.

In short, sustainability reporting is providing various benefits to companies. Companies use sustainability reporting as a way to ensure their continued existence. The benefits for stakeholders, however, are still very limited. This is mostly caused by the lack of legislations and regulations. Companies have power and control the reporting process which leads to managerial capture. This creates demand for sustainability assurance. Even though the reports are sensitive to managerial capture, sustainability reporting is still beneficial for stakeholders as a result of sustainability assurance evolving. Sustainability assurance is slowly starting to provide benefits such as increased credibility and reliability of the disclosed

information. Assurors are including stakeholders in their processes the credibility and reliability of the reported information can be increased.

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Samenvatting

Het doel van dit literatuuronderzoek is het bepalen van de voordelen die sustainability reporting biedt voor bedrijven en belanghebbenden en hiermee de waarde van sustainability reporting te definiëren. Belanghebbenden eisen naast financiële informatie ook sociale, ethische en milieu informatie. Sustainability reporting is de standaardmethode geworden voor bedrijven om deze informatie te verstrekken aan belanghebbenden. De legitimacy theory en de stakeholder theory worden gezamenlijk besproken om uit te vinden waarom bedrijven vrijwillig informatie verstrekken. De theorieën bieden gedeeltelijke verklaringen, wat leidt tot de conclusie dat meerdere theorieën gezamenlijk moeten worden toegepast om de motieven te verklaren. De waarde van sustainability reporting voor bedrijven is dat het een manier biedt om legitimacy te verkrijgen en te voldoen aan de eisen van belanghebbenden voor het voortbestaan van bedrijven.

De bijdrage van deze studie is het bieden van een breder en completer beeld van de manieren waarop sustainability reporting voordelen heeft voor bedrijven en belanghebbenden. De voordelen van stakeholder engagement en sustainability assurance zijn hiervoor

inbegrepen. Voorgaande literatuuronderzoeken zijn namelijk vooral gericht op een of twee van de hiervoor genoemde onderwerpen en bespreken nauwelijks het geheel.

Sustainability reporting kan bedrijven voorzien van verschillende voordelen. Bedrijven gebruiken sustainability reporting als een manier om hun voortbestaan zeker te stellen. De voordelen voor belanghebbenden zijn echter nog wel beperkt. Dit wordt veroorzaakt door een tekort aan wetgeving en regelgeving. Bedrijven hebben macht en

controle over het verslaggevingsproces wat leidt tot managerial capture. Dit leidt tot een vraag naar sustainability assurance. Ondanks het feit dat sustainability reports gevoelig zijn voor managerial capture, zijn sustainability reports toch bevorderend voor belanghebbenden dankzij de ontwikkeling van sustainability assurance. Sustainability assurance begint langzaam voordelen te bieden zoals hogere betrouwbaarheid en geloofwaardigheid van de gerapporteerde informatie. Auditors betrekken belanghebbenden bij het proces waardoor hogere betrouwbaarheid en geloofwaardigheid kan worden behaald.

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1. Introduction

Globalisation has played a big role in the past few decades. Companies have grown in size and power. As a result of this, the impact these companies have on the social, political and ecological environment all over the world has increased. Society is being affected not only in the present but also in the future by corporate activity. Stakeholders are not just thinking about their own interest, but also about the interests of long-term sustainability (Aras & Crowther, 2009). Adams & Zutshi (2004) state that the expectation for companies to act responsibly and be accountable for these impacts has also increased. Expectations for large multinational companies may be greater, but the responsibility of all companies to minimize the social and environmental impact is greater than before.

A survey showed that in 1999 only 35% of the world’s largest 250 global companies and 24% of the 100 largest companies in 41 countries published corporate responsibility reports (KPMG, 2013). Sustainability reports (or corporate responsibility reports) are defined as reports that disclose a company’s impacts – be they positive or negative – on the

environment, society and the economy (GRI, 2013). The amount of companies incorporating sustainability reporting in their business has increased rapidly in the past decades. Almost all large companies over the world have started to incorporate sustainability reporting in their business and it is becoming a standard business practice. Stakeholders are demanding reports to include ethical, social and environmental matters as well (Adams, 2004). In 2013 the percentages of companies that have adopted sustainability reporting have increased to 93% of the Global 250 and 71% of the 100 largest companies (KPMG, 2013).

The upward trend and the developments raise the question of what value sustainability reporting provides to these companies and their stakeholders. Even though there is mention that it is standard business practice, it is still on a voluntary basis and therefore companies would not adopt sustainability reporting if there is no value in doing so. Value is

economically defined as a measure for the benefits a good or service is able to provide. This literature review analyses the benefits sustainability reporting is able to provide to companies and stakeholders. There is still discussion around the value of sustainability reporting and concerning subjects such as sustainability assurance services and stakeholder engagement in this research area. The research area is moderately new and evolving which gives reason for literature review to contribute to the knowledge base. This study/paper/thesis is about finding out which benefits sustainability reporting is able to provide for companies and stakeholders. To find out what value sustainability reporting has for companies and stakeholders, it

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is important to take a look at the motives behind incorporating sustainability reporting. One of the theories that are broadly used to explain why companies choose to voluntarily adopt sustainability reporting is the legitimacy theory. In short, the theory is about companies trying to legitimise their activities by seeking approval from society (Deegan, 2002). A different theory that is also broadly used is the stakeholder theory. According to the stakeholder theory, companies seek approval from stakeholders. The reasoning behind this is that companies are dependent on stakeholders and must therefore answer their demands for support (Roberts, 1992). The motives for adopting sustainability reporting will therefore contribute to answering the question of what value sustainability reporting provides for companies and stakeholders. The value of sustainability reporting to companies and stakeholders is defined as the benefits it is able to provide. The legitimacy theory and stakeholder theory perspectives will be analysed in combination with empirical evidence supporting these theories to find out what benefits there are behind sustainability reporting from a company’s perspective.

Furthermore, there will be an analysis of stakeholder engagement in sustainability reporting and sustainability assurance. Stakeholder engagement and sustainability assurance are perceived as two ways to add value to sustainability reporting for companies and

stakeholders. Stakeholder engagement is about whether companies should involve

stakeholders in their (sustainability) matters. Sustainability assurance is a service that can be provided by audit firms to improve the content of the sustainability reports and provide reasonable assurance regarding the reliability of included information. In regards to sustainability assurance, this paper looks at the benefits sustainability assurance is able to provide and does not include literature covering the sustainability assurance process itself. An analysis of the motivations of companies for sustainability reporting leads to the conclusion that companies have multiple motives for adopting sustainability reporting and there is not one theory that includes a complete explanation. The legitimacy theory and stakeholder theory are overlapping and should be used collectively. Both theories aim for the company’s continued existence which is being achieved through sustainability reporting. In regards to stakeholder engagement, the legislations and regulations are still lacking, which diminishes its value for stakeholders because of managerial capture. Sustainability assurance is slowly but surely able to provide benefits such as increased reliability and credibility of the reports for stakeholders, but the value of sustainability assurance is also impaired by

managerial capture. Sustainability reporting is able to provide various benefits to companies such as improved governance, public trust which in turn improves image, improved

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sustainability reporting to companies is notably higher than the value it provides to

stakeholders. Companies still possess great control over the reporting process, which leaves room for manipulation and threaten the value of sustainability reporting for stakeholders. The contribution of this literature review is to provide a broader and complete view on ways sustainability reporting is able to be beneficial to companies and stakeholders. It

includes theories that are linked and subjects that are interdependent of each other. Prior literature reviews are mostly limited to one or two of the mentioned subjects, which is why a more complete and broader view can be regarded as a contribution to the research area. Readers are able to gain knowledge about sustainability reporting without relevant topics being left out.

Section two consists of background information about sustainability reporting and its development. In section three, background information on the legitimacy theory (paragraph 3.1) and stakeholder theory (paragraph 3.2) can be found, with a literature review regarding these theoretical perspectives and supportive evidence (paragraph 3.3). Section four

introduces stakeholder engagement (paragraph 4.1) together with an analysis of important literature. Section five consists of an introduction to sustainability assurance (paragraph 5.1) together with the discussion of the key literature about these practices (paragraph 5.2). The last section is the discussion and conclusion, which report the findings and conclusions of this literature review by answering the research question.

2. Development of Sustainability Reporting

Sustainability reporting is defined as reporting that discloses a company’s impacts –be they positive or negative – on the environment, society and economy (GRI, 2013). According to the GRI (2013) it is a process that assists the company in setting its own goals, measuring their performance and managing change towards a sustainable global economy – one that combines long term profitability with social responsibility and environmental care. Sustainability reporting is seen as a way of communicating a company’s economic, environmental, social and governance performance.

Social accounting first started receiving interest from business managers and academic researchers in the 1970s. Companies in the US and Western Europe began adopting social accounting practices. Social accounting was defined as “the identification, measurement, monitoring and reporting of the social and economic effects of an institution on society” (Kolk, 2005). It was intended for internal managerial and external accountability purposes.

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Social reporting back then was still very limited; companies barely published more than a page of such information in their annual reports.

Gray (2001) mentions that social accounting started to fall off in the 1980s due to recessions. The recessions lead to unemployment and inflation and caused the emphasis to shift away from social and environmental issues and back to the economy. Social accounting was not institutionalized and the general interest disappeared. Approaching the end of the 1980s the attention started to shift back to social and environmental issues. Due to

globalisation companies were pressurized by stakeholders to report on social and

environmental issues. Especially multinationals were targeted to show their commitment and their activities undertaken to prevent human rights violations, environmental pollution and other ‘externalities’ of international trade and production (Kolk, 2003). Companies were held responsible for minimizing their social and environmental impact.

Governments also started to further support sustainability reporting by regulation and encouragement. Some countries, such as the Netherlands, Denmark and Sweden require companies to report their environmental performance to the public (Adams & Zutshi, 2004). Due to lack of generally accepted international organisations, companies such as the Global Reporting Initiative (GRI), Fédération des Experts Comptables Européens (FEE) and AccountAbility provide assistance to companies with guidelines and recommendations. The Global Reporting Initiative has published guidelines to reporting in 2002 and a revised version in 2006 which has been extensively used by a large number of companies (Kolk, 2004). All these factors together have led to a steady increase in the amount of sustainability reports in the past decades. The KPMG surveys conducted every three years show this upward trend. From 12% of the Largest 100 companies (N100) in 1993 to 71% in 2013 and from 35% of the Fortune Global 250 companies in 1999 to 93% in 2013 (as indicated in figure 2.1).

Figure 2.1 Growth in reporting since 1993

A bar graph showing trends in sustainability reporting according to KPMG surveys. KPMG has been conducting surveys about sustainability reporting every three years. The purple bars stand for the percentage of the largest 100 companies in 41 countries that report their sustainability. The blue bars represent the percentage of the Fortune Global 250 companies participating in sustainability reporting.

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3. Theoretical Perspectives on Company motivations for adopting

Sustainability Reporting

The reasons why companies decide to adopt sustainability reporting give insight about the benefits of sustainability reporting. Thus, the following paragraphs discuss detailed

background information about the different theories is. The detailed background information will be followed up by a literature review on motivations for adopting sustainability reporting and will review various studies which discuss, support, contradict and analyse the mentioned theories.

3.1 Legitimacy Theory

To identify what value sustainability reporting has for companies, the motivations for

voluntarily reporting are examined. One of the main theories that have been used in literature to explain the reasons why companies voluntarily disclose information is the legitimacy theory. The legitimacy theory is built upon the political economy theory which embraces the perspective that society, politics and economics are inseparable and economic issues cannot meaningfully be investigated in the absence of considerations about the political, social, and institutional framework in which the economic activity takes place (Deegan, 2002). Lindblom (1994) defined legitimacy as

a condition or status which exists when an entity’s value system is congruent with the value system of the larger social system of which the entity is a part. When a disparity, actual or potential, exists between the two value systems, there is a threat to the entity’s legitimacy (p. 2).

The basis for the legitimacy theory is that companies operate in society via a social contract, expressed or implied, whereby its survival (business continuity) and growth are based on the delivery of some socially desirable ends to society in general and the distribution of

economic, social, or political benefits to groups from which it derives its power (Shocker & Sethi, 1973). Shocker & Sethi (1973) state that:

Any social institution – and business is no exception – operates in a society via a social contract, expressed or implied, whereby its survival and growth are based on: (1) the delivery of some socially desirable ends to society in general, and (2) the distribution of economic, social, or political benefits to groups from which it derives power.

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In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent. Therefore, an institution must constantly meet the twin tests of legitimacy and relevance by demonstrating that society requires its

services and that the groups benefiting from its rewards have society's approval. (p. 97)

Companies therefore believe that they require approval from society to be able to exist; they try to find legitimacy for their corporate operations by publishing sustainability reports. The idea that there is a social contract between companies and society, leads to companies voluntarily adopting sustainability reporting. The belief is that it is necessary for business continuity and by adopting sustainability reporting to legitimise operations, the risk of going against society’s ethics and standards is reduced. Figure 2 below explains this concept well.

Figure 3.1 Venn diagram addressing Corporate Legitimacy

The left circle indicates society’s expectations and perceptions of a corporation’s activities. The right circle indicates the actual actions and activities of a corporation. The area marked X stands for congruence between the social values inherent in their activities and societal norms. The legitimacy theory attempts to increase this area as much as possible. The area marked Y and Z represent incongruence, which form a legitimacy gap (O’Donovan, 2002).

According to Suchman (1985), the literature on organisational legitimacy theory can be divided in two approaches: strategic and institutional. The strategic approach sees

legitimacy theory as an operational resource that organisations extract from their cultural environments to pursue their goals (Suchman, 1985). A higher level of managerial control over the legitimation control process is assumed. Conflict between management and constituents is frequent because managers use symbols and rituals to obtain real pursue financial goals. Legitimation is purposive, calculated and oppositional.

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legitimation as an operational resource. Suchman (1985), mentions that under this approach legitimation is viewed as a set of constitutive beliefs. Organisations are influenced by external institutions in every respect. Managers have the same belief as society and the organisation’s operations are in congruence with society’s beliefs.

Suchman (1985) identified three primary forms of legitimacy theory: pragmatic, moral, and cognitive. All three types involve a generalized perception or assumption that organisational activities are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.

Suchman (1985) states that the self-interest of the primary audience of an organisation the basis is for pragmatic legitimacy. The primary audiences become constituents and pay attention to the consequences of the organisation’s behaviour. There are two important variants of pragmatic legitimacy: exchange legitimacy, and influence legitimacy. Exchange legitimacy finds that the support of stakeholders for an organisation’s behaviour is based on the expected value of this behaviour (Suchman, 1985). The influence legitimacy mentions that stakeholders do not only support organisations for specific favorable exchanges, as is the case with exchange legitimacy, but also for their larger interests (Suchman, 1985).

Moral legitimacy takes a different approach, it is not based on whether the activities are beneficial to stakeholders but whether an organisation’s activities are the right thing to do and promote societal welfare (Suchman, 1985). Self-interest of the stakeholders is not the primary focus. According to Suchman (1985) the variants of the moral legitimacy focus on what organisations accomplish and what the consequences are of these accomplishments (outputs) (consequential legitimacy), the procedures used to accomplish these outcomes (procedural legitimacy), structural characteristics of an organisation that can be morally favored (structural legitimacy), and the charisma of individual organisational leaders (personal legitimacy).

Support for an organisation can be active or passive. Cognitive legitimacy states that organisations can achieve passive support by being comprehensible, legitimacy comes from the availability of models that explain the organisation’s behaviour. Active support can be achieved through taken-for-granted legitimacy: when alternatives become unthinkable, challenges become impossible and legitimacy becomes absolute (Suchman, 1985). This is the most powerful source of legitimacy but also the hardest to attain.

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3.2 Stakeholder Theory

The stakeholder theory is one of the competing theories with legitimacy theory in explaining why companies decide to voluntarily adopt sustainability reporting. This theory is also

derived from the political economy theory and shares some characteristics with the legitimacy theory. The stakeholder theory states that companies are dependent on groups that provide required resources to the company that are needed to exist (Roberts, 1992). The theory provides insight on the different views and needs of different groups within society. In

contrast to the idea that companies form a social contract with society (legitimacy theory), the stakeholder theory implies that organisations form various contracts with different stakeholder groups because each one of these groups has a different view on how the organisation should conduct its operations (Deegan & Blomquist, 2006).

Companies survive by acquiring and maintaining resources. The resources these companies need are acquired externally because companies are not contained or self-sufficient (Ullman, 1985). According to Pfeffer & Salancik companies are embedded in an environment consisting of other companies (as cited in Ullman, 1985). They depend on others for the resources they require and make transactions to acquire the resources. The

organisations and individuals who provide these resources to the organisation are called stakeholders. The groups of stakeholders mostly consist of the government, customers, suppliers, employees, investors and banks. Under this view companies require the support of the stakeholders and the companies’ activities are subject to stakeholders’ approval (Gray, Kouhy & Lavers, 1995).

Disclosing information in the form of sustainability reports can be seen as a method to gain or maintain support from the different stakeholder groups; corporate disclosure is a strategy for managing, or even manipulating, the demands of these groups (Deegan &

Blomquist, 2006). Key stakeholders who provide critical resources to the organisation have a certain degree of stakeholder power, it is important for the organisation to meet the needs of these key stakeholders to maintain support from these groups (Deegan & Blomquist, 2006; Gray et al., 1995; Ullman, 1985).

Azzone, Brophy, Noci, Welford & Young (1997) mention that published

environmental reports are seen as highly incomplete by some stakeholders such as banks, insurance companies, and firms operating in the supply chain. This problem is solvable by identifying the key stakeholders, which, according to Azzone et al. (1997), are grouped into: academia, employees, environmental NGOs, financial community, local community,

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regulators and policy makers, shareholders, and trade & industry. Without the support of these stakeholders the company would cease to exist. Each one of these groups require different information needs which vary greatly and make it difficult for companies to manage the stakeholders, as can be seen in figure 3.2 below.

Figure 3.2 The information needs of target groups

This table shows the information needs of the different groups of stakeholders according to Azzone, Brophy, Noci, Welford & Young (1997). The different kind of groups are lined up on the x-axis, the different information categories can be found on the y-axis.

3.3 Literature Review on motivations for adopting Sustainability Reporting

Even though there has been an increasing trend in companies adopting sustainability reporting, these practices are still mostly on a voluntary basis. For companies to disclose information voluntarily, there must be some motives or reasons companies have. Researchers

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have been trying to find explanations for why companies do so. As was mentioned before, there are two theories that have been extensively relied upon to explain this phenomenon, but there is no theory that has been accepted as the explaining theory. The main motivation for sustainability reporting when taking the legitimacy perspective is that organisations are looking to legitimise their operations through the disclosures. Lindblom (1994) argues that there are four strategies one can follow to obtain, or maintain legitimacy:

(1) educate and inform its “relevant publics” about (actual) changes in the organisation’s performance and activities;

(2) change the perceptions of the “relevant publics” – but not change its actual behaviour;

(3) manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols; or (4) change external expectations of its performance.

Guthrie & Parker (1989) mention that legitimacy theory is largely reactive in that it suggests that organisations aim to produce congruence between the social values inherent in their activities and societal norms, the strategies mentioned above from Lindblom are consistent with this view. Lindblom (1994) and Guthrie & Parker (1989) interpret corporate social disclosures as reacting and responding to the environment to legitimise corporate operations. By adopting sustainability reporting, a company is able to implement the

strategies mentioned above. In general, companies educate and inform the public about events and issues in an organisation’s performance, activities and the direct environment a company is operating in. A company can for example choose to divert the public’s attention from negative news related to the company and its environment by revealing positive information about other events and issues (Lindblom, 1994). These strategies suggest that disclosures are made when positive or negative changes happen through events and issues related to the company and its environment. Guthrie & Parker (1989) attempt to find a significant relationship between disclosures and occurring events and issues related to an Australian mining and manufacturing company, named Broken Hill Proprietary Company Ltd. (BHP Ltd.). In their study Guthrie & Parker (1989) aim to find evidence supporting the legitimacy theory. Major events and issues related to BHP Ltd. and its environment were identified by using various publications about BHP Ltd. and its industry. Disclosures were categorized into environment, energy, human resources and community involvement. To find a relation between the legitimacy theory and sustainability reporting, Guthrie & Parker (1989) compared the timing of observed peaks of disclosure to the identified events and issues

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related to BHP Ltd. and its environment occurring before or during the peak periods. Concurrence between the timing of observed peaks of disclosure and identified events and issues related to BHP Ltd. and its environment would provide evidence supporting the legitimacy theory. The results of this study did not show a significant relation between the disclosures and occurring events, there was no consistency between the peak of disclosures and events. It did not seem like BHP Ltd. used social disclosures to react to economic, social or political conditions or events and obtain and maintain legitimacy for their corporate operations (Guthrie & Parker, 1989). However, because of the limitations of this study the legitimacy theory has not been disproved. The study was limited to only one company and did not manage to accurately account for time lag in reporting that might have occurred in BHP Ltd.’s case. They also based their research on the events and issues that were mentioned in a limited number of publications which most likely did not cover the full (relevant) history. Deegan, Rankin & Tobin (2002) decided to examine the same company. It can be seen as a further development of the study of Guthrie & Parker (1989). Instead of looking at peaks of disclosure during events and issues that have occurred like Guthrie & Parker (1989) did, Deegan et al. (2002) took a different approach and wanted to test the relationship between community concern for particular social and environmental issues (as measured by the extent of media attention), and BHP Ltd.’s annual report disclosures on the same issues. Both studies (Deegan et al. and Guthrie & Parker) match social disclosures with public concern. Deegan et al. (2002) examine whether BHP Ltd. disclosed social and environmental information in the period from 1983 to 1997 in response to particular social expectations which typically change across time. In contrast to Guthrie & Parker (1989), Deegan et al. (2002) take a look at media attention for BHP Ltd. and its activities. Deegan et al. (2002) state that the study is based on the belief that media attention reflects public concerns, which gives reason for them to use a different measure for public concern than Guthrie & Parker (1989) did. According to the media agenda setting theory, there is a relationship between media attention to various topics and how prominent these topics become for the general public (Deegan et al., 2002). Media attention ensures that the general public is aware of what is going on, thus media attention shapes the public priorities and concern. An increase in media attention induces public concern. According to the legitimacy theory there should be consistency between public concerns that are reflected by the media attention it receives and the social and environmental disclosures in reports from BHP Ltd. and Deegan et al. aim to find confirmation. To find the confirmation they are looking for, Deegan et al. (2002) formed two hypotheses:

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Ltd.’s social and environmental performance will be associated with higher (lower) levels of specific social and environmental disclosures made by BHP in its annual reports (H2) Higher (lower) levels of unfavourable print media coverage given to specific attributes will be associated with higher (lower) levels of specific positive social and environmental disclosures made by BHP Ltd. in its annual report.

Companies are likely to take action when the opinion of the public is that the company is not meeting the expectations of the social contract with society. Because of the belief that media attention can influence the public opinion, they will take steps to demonstrate their legitimacy and relevance to society by countering unfavourable media coverage in the annual report (Deegan et al., 2002). The first hypothesis is formulated based on the proposition that changes in society concerns, reflected by changes in the themes of the media agenda, will be mirrored by changes in the social and environmental themes disclosed, and the extent of the disclosure made (Deegan et al., 2002). This first hypothesis does not make a distinction between positive or negative media attention and disclosures. The second hypothesis is based on prior research of O’Donovan. O’Donovan (1999) found that if the media attention is of a negative or

unfavourable nature, organisations have a greater incentive to provide more positive disclosure to obtain or maintain their legitimacy (as cited in Deegan et al., 2002). Both hypotheses have been used before in prior research from Brown & Deegan (1998) which studied the media agenda setting theory and the legitimacy theory in various industries in Australia.

The hypotheses of Deegan et al. (2002) implicitly include the strategies mentioned by Lindblom. According to Lindblom (1994), companies use sustainability reporting to inform the public of their actual behaviour and changes to their behaviour. Prominent themes in the media lead to disclosures related to these themes because the company wants to inform or educate the public of their actual activities. The sustainability report themes were divided into the environment, energy, human resources, community involvement and others. Negative media attention causes the public opinion to become negative and threaten the company’s legitimacy. Lindblom (1994) states that negative media attention related to a company can be countered and the perception of the company can be manipulated by publishing positive disclosures. Companies can also change the perceptions of the public by acting like they are in compliance with the societal norms without changing its actual behaviour.

In contrast to the results of Guthrie & Parker’s (1989) study, Deegan et al. (2002) managed to find supportive evidence supporting the legitimacy theory in the reporting

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behaviour of BHP Ltd.. Deegan et al. (2002) overcame obstacles Guthrie & Parker (1989) could not; they managed to formulate a measure for public concern that was not limiting to the research. The results of their research concluded that the specific issues attracting the greatest level of media attention (which were environmental and human resources), were also generally the issues which had the greatest amount of annual report disclosure. The empirical testing supported the first hypothesis. The second hypothesis was also supported by empirical testing, management indeed try to counter unfavourable media attention by releasing positive information. The legitimacy theory and the strategies under the legitimacy theory mentioned by Lindblom (1994) to obtain and maintain their legitimacy could be identified in BHP Ltd.’s reporting behaviour. The results are consistent with prior research of Brown & Deegan (1998) where various industries were studied and evidence supporting the legitimacy theory was found in the majority of those industries. There are various more studies that have been able to find evidence that support the legitimacy theory such as Hogner (1982), Patten (1992) and previous studies from Deegan (Deegan & Rankin, 1996; Brown & Deegan, 1998) which are not included in this literature review.

Deegan (2002) argues that there are many various reasons for managers to voluntarily decide to report social and environmental information. There could be several motivations simultaneously driving organisations to report social and environmental information and expecting that one motivation might dominate others would be unrealistic. Besides the usual legitimacy theory, which has been embraced by many researchers, he also mentions the stakeholder theory. Some researchers argue that there is no clear distinction between the legitimacy theory and the stakeholder theory (Deegan, 2002; Gray et al., 1995). As was mentioned before, both theories were derived from the political economy theory and share characteristics. Gray et al. (1995) view the distinction between stakeholder theory and legitimacy theory as incorrect; they are better seen as two overlapping perspectives. The two theories can be seen as overlapping theories, where stakeholder theory stops, and legitimacy theory starts (Gray et al., 1995). An explanation for this view is that legitimacy theory is directed at the whole society, which consists of stakeholders. The stakeholder theory refers to particular groups within society. The theories are both set within a framework of assumptions about political economy and need not be seen as competitors for explanation but as sources of interpretation of different factors at different levels of resolution (Gray et al., 1995). The stakeholder theory is more refined and accepts that different stakeholder groups have different views on how an organisation has to conduct its operation, which leads to various social contracts with these different stakeholder groups rather than one social contract with society,

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as is the case with the legitimacy theory (Deegan & Blomquist, 2006).

Donaldson & Preston (1995) argue that there are different ways the stakeholder theory can be presented and applied and that they are quite distinct and require different

methodologies, types of evidence, and criteria of appraisal. Three types of uses are analysed in Donaldson & Preston’s (1995) study. According to Donaldson & Preston (1995) the stakeholder theory can be used as descriptive/empirical. It is then used to describe or explain the characteristics of an organisation and its behaviour. The instrumental aspect is used to identify the connections between stakeholder management and the performance of an organisation, defined by the achievement of traditional corporate objectives (Donaldson & Preston, 1995). The normative aspect serves to interpret the function of the organisation, and includes the identification of moral or philosophical guidelines for the operations and

management of organisations (Donaldson & Preston, 1995). In the literature, the stakeholder theory is justified differently based on which type of stakeholder theory is applied.

Descriptive justifications try to find matches between the concepts in the theory and reality. Instrumental justification points to evidence of the connection between stakeholder

management and corporate performance. Normative justifications appeal to underlying concepts embedded in the theory. The three stakeholder aspects are nested together according to Donaldson & Preston (1995), as shown below in figure 3.3. The external layer is

descriptive and explains relationships that are observed. The outer layer is supported by the second layer, the instrumental aspect which is predictive; if certain practices are carried out, then certain results will be obtained. The core of the theory is the normative base (Donaldson & Preston, 1995). The recognition of obligation to stakeholders’ interest that is valuable to the organisation.

Figure 3.3 Three aspects of the Stakeholder Theory

The external layer is descriptive and explains relationships that are observed. The outer layer is supported by the second layer, the instrumental aspect which is predictive; if certain practices are carried out, then certain results will be obtained. The core of the theory is the normative base. The recognition of obligation to stakeholders’ interest that are valuable to the organisation. (Donaldson & Preston, 1995)

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Deegan (2002) mentions only two branches in the stakeholder theory, namely an ethical branch and a managerial branch. In comparison to the distinction Donaldson & Preston (1995) made, the ethical branch mentioned by Deegan includes the descriptive and normative aspect of the stakeholder theory. The ethical branch of the stakeholder theory consists of how organisations should treat their stakeholders and describes the responsibilities of

organisations. Donaldson & Preston (1995) concluded from their research that the stakeholder theory is managerial and recommends attitudes, structures, and practices that, taken together, constitute a stakeholder management philosophy. The managerial branch of the stakeholder theory mentioned by Deegan (2002), indicates that organisations have to manage key stakeholders who have control over critical resources for the organisation to continue its operations. This branch can be compared to the instrumental aspect mentioned by Donaldson & Preston. Ullman’s research (1985) provided evidence supporting a positive correlation between stakeholder power and social performance. Ullman (1985) concluded that the greater the power of stakeholders, the greater the importance of meeting stakeholder demands

increases. Social performance was defined as the result of a strategy for dealing with stakeholder demands. According to Gray et al., (1995) organisations exert more effort in managing the relationships with key stakeholders that are important to the organisation, which is consistent with the findings of Ullman’s (1985) research. Taken together, this means that when stakeholders provide important resources to a company, the company cannot ignore stakeholders’ demands and the company has to respond by disclosing information and changing their activities. Companies have to adapt more to powerful stakeholders and social disclosure is part of the dialogue between the company and its stakeholders (Gray et al., 1995). Both of these findings fall under the instrumental justification mentioned by

Donaldson & Preston (1995). The stakeholder theory was used here to identify the connection between the performance of the organisation and the way it manages stakeholders. Donaldson & Preston do mention that instrumental justification is insufficient to stand alone as a basis for the stakeholder theory:

The most thoughtful analyses of why stakeholder management might be casually related to corporate performance ultimately resort to normative arguments in support of their views. (p. 87) To summarize, evidence for both legitimacy theory and stakeholder theory can be found in various studies. Companies can have multiple reasons for adopting sustainability reporting which leads to the conclusion that one theory simply cannot cover the whole base. This is most likely the reason why there is no “accepted” theory yet that is completely

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applicable. Multiple theories should be used to provide a framework for the motivations behind adopting sustainability reporting. The legitimacy theory and stakeholder theory are considered as overlapping theories and should therefore be used cooperatively. The main benefit found for adopting sustainability reporting is that it serves as a method to obtain legitimacy and satisfy stakeholders’ expectations to assure the continued existence of the company. The next sessions focus on the benefits sustainability reporting is able to provide to the stakeholders of the companies. Section four discusses stakeholder engagement and its benefits for companies and stakeholders.

4. Stakeholder Engagement

To answer what value sustainability reporting is able to provide to stakeholders the effects of stakeholder engagement and reporting assurances have to be considered. This section is about stakeholder engagement. It starts off with background information about stakeholder

engagement followed by a review of relevant literature. The literature review discusses important articles that analyse the benefits sustainability reporting is able to provide, more specifically for stakeholders.

4.1 Information on Stakeholder Engagement

Stakeholders need material information for their decision-making. Stakeholder engagement helps stakeholders get access to the information they need by being involved in the company and its (reporting) activities. The credibility and reliability of the information companies disclose in their reports can be questioned which is why reporting assurance plays a role. Stakeholders might be able to get better insight through assurance and facilitate decision-making.

Stakeholder engagement can be defined as a practice in which a company tries to involve stakeholders in a positive way in business activities. Companies must build and maintain their relationships with stakeholders. It is important to make a distinction between stakeholder management and stakeholder engagement. Stakeholder management is more about one-way communication and managing the stakeholders. Stakeholder engagement is a process that creates a dynamic context of interaction, mutual respect, dialogue and change, not a unilateral management of stakeholders (Manetti & Toccafondi, 2014). The involvement of stakeholders is ideally a mutually beneficial and cooperative relationship. The relationship

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is based in reciprocity, interdependence and power which leads to mutual responsibility and not just only involvement of stakeholders for the sake of managing their expectations (Manetti & Toccafondi, 2014).

Perrini & Tencati (2006) state that a company’s sustainability depends on its relationships with stakeholder and the company must engage with not only shareholders, employees and clients, but also suppliers, financial business partners, public authorities, local or national community and civil society in general. Their future existence is dependent on the sustainable bonds they form with stakeholders. The relationships companies have with these stakeholders are diverse and each group of stakeholders is accompanied by different demands and different information needs (Azzone et al., 1997).

An important matter of stakeholder engagement is the way these different groups of stakeholders are prioritized; a distinction has to be made between important and less important stakeholders (Manetti & Toccafondi, 2014). It is therefore important for the company to properly identify their stakeholders and their priority. By practicing stakeholder engagement the company’s stakeholders become more involved and their interest surpasses their self-interest, they assume the role of moral agents (Manetti & Toccafondi, 2014)

4.2 Literature Review Stakeholder Engagement

A common feature of sustainability reporting is the aim to address the information needs and concerns of organizational stakeholders (Owen, Swift & Hunt, 2001). Companies that are adopting sustainability reporting are engaging with stakeholders to discuss about their strategies, operations and performances. The Global reporting Initiative, which as mentioned before, is used as a guideline extensively by companies adopting sustainability reporting, aims to provide reliable and relevant information to stakeholders facilitating engagement and dialogue between stakeholders and organisations (GRI, 2006).

Adams (2002) conducted research about internal organizational factors influencing corporate social reporting. Adams did so by interviewing three British companies and four German companies, which were amongst the largest companies in the chemical or

pharmaceutical business. The interviews had different themes; one of these themes was stakeholder involvement. In contrast to what Owen et al. (2001) concluded, Adams (2002) concluded that the companies which incorporated stakeholder engagement into their processes were experiencing benefits of reporting:

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- builds trust which in turn improves image; - products which satisfy stakeholder demands

- improves information access and therefore decision-making; and - minimises risks (e.g. of consumer boycotts, unforeseen issues). (p. 233)

The level of involvement of stakeholders is expected to influence reporting. An extensive dialogue process with proper governance structures should result in the company reporting on matters it would otherwise not report on (Adams, 2002).

According to Gray (2001), proper social accounting should ‘hurt’ companies. It is supposed to bring up difficulties for the company and force companies to adapt and change. If social accounting does not ‘hurt’ companies in any way, it is ineffective. Gray argues that social accounting can have one of four primary objectives:

- to discharge accountability to stakeholders; - to control stakeholders;

- to move towards sustainability reporting; or - to be an exercise of self-justification. (p. 11)

The first two objectives are of importance in this analysis. Sustainability reporting is ideally a way for a company to show transparency and accountability to stakeholders. Accountability is explained by Gray (2001) as identifying what one is responsible for and providing the

necessary information about these responsibilities to those who have rights to that

information. Those who have rights to this information are the stakeholders. The results of Adams’ (2002) research point in the direction that companies are using sustainability reporting to control stakeholders. If those companies were genuinely discharging accountability to stakeholders, the mentioned benefits would not have been identified. Consistent with this approach, Owen et al. (2001) claim that reporting from a business perspective barely leads to any form of accountability, organisations are engaging in stakeholder dialogue for the purpose building their reputation by reporting on their trustworthiness, not for transparency and accountability. This practice can be found in the identified benefits by Adams (2002), which state that one of the benefits identified is building ‘trust’ with stakeholders which improves the corporate image (reputation). When approached this way, stakeholder engagement is used to achieve the objective of controlling stakeholders and not the objective of discharging accountability to stakeholders. In no way do the

companies get ‘hurt’ by being transparent and revealing illegitimate practices to stakeholders, like how Gray (2001) believes it should be. Sustainability reporting is still done voluntarily

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which means that organisations must have some interests in disclosing information

voluntarily. If companies were reporting genuinely, it would be all about accountability and democracy, which would ‘hurt’ the companies and is unlikely to be in the organisation’s short-term and conventional interests (Gray, 2001; Owen et al., 2001). Therefore, Owen et al. (2001) believe that for stakeholder engagement to be meaningful instead of being a

management tool there needs to be some mechanism for stakeholders to influence decision-making and hold organisations to account. Owen et al. (2001) stress their concerns about stakeholder engagement being a management tool for reporting instead of a method for becoming accountable to stakeholders. O’Dwyer & Owen (2005) repeat the concerns about managerial capture. Managerial capture is the concept that management strategically collects information and only report information that boost corporate image, instead of showing transparency and accountability to the society (Owen, Swift, Humphrey & Bowerman, 2000). There is a need for administrative reform and institutional reform (Owen et al., 2001).

Administration reform refers to developing accounting techniques that are able to provide more organizational transparency. Institutional reform is meant to empower stakeholders by instituting more participatory forms of corporate governance (Owen et al., 2001). Corporate governance is still lacking and missing democracy and accountability. Stakeholder

engagement without regulations and legislations is not very effective, and does not produce reports that are reliable and credible for stakeholders. Dealing with social and environmental concerns of stakeholders is not of significant importance to organisations if no significant benefits to the business are identified. Standardisation achieved with regulations and

legislations will force companies to be more transparent about their operations than engaging in dialogues with stakeholders. Owen et al. (2001) show their doubts about whether

stakeholder engagement without support from governments through regulations and

legislations will be able to provide more than being just corporate propaganda. Gray’s (2001) conclusion is consistent with the statements found in Owen et al. (2001); voluntary reporting must be an activity which is broadly in the interests of the organisation undertaking it, if it was about accountability and democracy, then it is highly unlikely to be in the organisation’s short-term and conventional interests. The democracy mentioned by Owen et al. (2001) refers to stakeholder democracy in an organisational context. It is defined as means by which

organisational stakeholders are enabled to influence managerial decisions substantially affecting their welfare (O’Dwyer, 2005).

Adams (2004) studies to what extent companies discharge accountability to its stakeholders. Discharging accountability to its stakeholders by companies was mentioned as

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one of the primary objectives of social accounting by Gray. Companies sometimes forget that sustainability reporting is about ethical, social and environmental sustainability and not about business sustainability (Adams, 2004). According to Adams, the biggest problem in

sustainability reporting is its lack of completeness. The completeness of sustainability reports is dependent on the involvement of stakeholders. In concurrence with Owen et al., Adams also states that the power of companies lead to companies using stakeholder engagement as a legitimating tool. The company can claim that it has involved stakeholders in its reporting process while controlling the information disclosed.

Adams (2004) does a case study on company Alpha and its sustainability reporting in two different years. Alpha is a large, multinational company operating in an industry in which environmental impacts and health and safety issues are significant. The completeness of the sustainability reports of Alpha were lacking. Adams (2004) compared the information reported to the information available in external sources and noticed a lack in disclosure on ethical, social and environmental impacts. The lack of disclosed information leads to the conclusion that Alpha was not discharging accountability to stakeholders. In accordance with Gray’s (2001) concept of proper social accounting should hurt companies, Adams (2004) identified a lack of coverage of negative impacts. The reports were lacking in completeness, details crucial to key stakeholder groups were not disclosed in the sustainability reports. As Owen et al. (2001) have concluded before, Adams concludes again that due to the nature of voluntary reporting and lack of legislation and regulations, companies have too much control over the process and there are no mechanisms for stakeholder groups to facilitate transparency and accountability. Adams (2004) compares sustainability reporting to financial reporting and states that the degree of incompleteness in sustainability reporting would be unacceptable in financial reporting.

O’Dwyer (2005b) also did a case study examining the social accounting process, specifically for an Irish overseas aid agency, called Agency for Personal Services Overseas (APSO). Its focus also lies on the extent of stakeholder empowerment in the process.

O’Dwyer (2005a) argues that a successful stakeholder democracy relies on stakeholders being able to hold organisations to account for decisions impacting on their welfare. O’Dwyer (2005a), in concordance with Owen et al., states that mechanisms through which stakeholders can engage with organizational management on issues of concern in order to influence

organisational decisions impacting on their lives are essential in enabling the democratic governance of organisations. Two factors are presented by Backstrand & Saward (2004) to assess the democratic features of stakeholder engagement, namely representativeness and

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influence (as cited by O’Dwyer, 2005a).

APSO is a non-profit organisation focused on human development in developing countries. The two factors mentioned by Backstrand & Saward can be identified in the case study of O’Dwyer. The social accounting process started off with APSO trying to identify key stakeholders. APSO immediately faced obstacles regarding identification of local

communities as key stakeholders. APSO deliberately excluded key people in villages and hospitals the developing countries (O’Dwyer, 2005b). The excluded key stakeholders did not have a voice in the process. One of the mentioned factors to assess the democratic features of stakeholder engagement was representativeness, key stakeholders are excluded in the APSO’s process of social accounting which leads to the conclusion that the identified stakeholders are lacking key stakeholders and therefore the representativeness is undermined. According to O’Dwyer (2005b), a manager stated that the practices could be perceived as “quality

brainwash”, which overtook the process of focusing on the various agencies and NGOs while appearing to have little concern for the voices of the local people APSO was supposed to serve. Besides the fact that key stakeholders were excluded, O’Dwyer also concluded that the stakeholder dialogue was only a one way process, instead of a two-way process. When the report had to be written, the APSO board forced their way into the process to have control over the process and influence the stakeholder voices (O’Dwyer, 2005b).The board was seen as being very defensive and did not take the accounts very seriously at all (O’Dwyer, 2005b). Stakeholders’ perspectives were suppressed and rewritten and lead to mistrust of management by stakeholder groups. The influence of stakeholders that was observed is minimal. The stakeholders’ perspectives were disappearing in a ‘black hole’ and were not considered any further. The social accounting process did not bring about change; there was deficiency in feedback from APSO regarding the stakeholders’ perspectives. These practices undermine the goal of reporting: accountability (O’Dwyer, 2005b; Adams, 2004; Gray, 2001; Owen et al., 2001). The degree of stakeholder democracy is low based on the two presented factors used by O’Dwyer (2005a), which tells us that the stakeholder engagement process is therefore ineffective.

Evidence supporting Owen et al. (2001) was found by O’Dwyer (2005b): there is lack of institutional mechanisms meant to empower stakeholders through more formal

participatory forms of corporate governance. Organisations have too much power over the stakeholders and are able to control them (O’Dwyer, 2005b). This last conclusion can be linked back to the objectives social accounting can have according to Gray. As mentioned before, instead of having accountability to stakeholders as primary objective, this case

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demonstrates that it is used as a means to control stakeholders (Gray, 2001). Stakeholder management practices in sustainability reporting displace any meaningful moves towards expanding corporate accountability towards stakeholders (Owen et al., 2001). True stakeholder engagement would mean that companies would have to deal with substantial intervention in their operations and processes than right now is occurring.

Further development of the two factors mentioned by Backstrand & Saward can be identified in the research of Unerman & Bennett (2004). Unerman & Bennett (2004) argue that there are two key problems in the concept of stakeholder engagement, namely identifying a wider range of stakeholders and determining a consensus set of stakeholder expectations from a range of different views by different stakeholders. The stakeholder expectations are often mutually exclusive and far from homogeneous which makes it difficult for companies to form a consensus set of stakeholder expectations (Unerman & Bennett, 2004). Companies face a number of mutually exclusive social, environmental, economic and ethical

responsibilities based on the fact that companies have various relationships with different stakeholder groups (Unerman & Bennett, 2004). Companies must therefore find a way to sort these responsibilities and decide which ones to address.

There are stakeholder groups who do not have enough power to have economic influence over a particular company even though they are still significantly affected by the company’s activities (Unerman & Bennett, 2004). There are also stakeholder groups that are indirectly affected by the company’s activities which are not recognised as stakeholders by the company. Unerman & Bennett (2004) consider that it is undemocratic for these

stakeholder groups to not be able to have some influence on the company’s activities and behaviour. The interests of these stakeholder groups might be represented by other groups that do have economic power but this assumption alone is not considered enough. Ideally,

stakeholder democracy would include all possible stakeholders in a debate which aims to reach a consensus regarding the acceptability of different corporate actions (Unerman & Bennett, 2004).

Unerman & Bennett (2004) provide a case study of Shell and its attempt to introduce a web forum for stakeholders is used to identify how the internet is able to facilitate stakeholder engagement. The web forum of shell offers everyone to be able to express their view and freely debate about the activities and responsibilities of Shell. Unerman & Bennett (2004) concluded that even though the option for all stakeholders to engage in stakeholder dialogue through the web forum of Shell, it did not guarantee the participation of mentioned

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cooperative discourse impaired the ability to fulfil its potential of acting as a medium for stakeholder engagement. Unerman & Bennett (2004) recognise the difficulties of achieving representativeness, mentioned by O’Dwyer (2005a), Backstrand & Saward. Another problem found by Unerman & Bennett is whether Shell genuinely wanted feedback and perspectives from its stakeholders to incorporate into their policies and activities or whether it more used as a way of gaining trust and improving corporate image. Their study did not provide means to assess whether the information gathered from the web forum was incorporated in the decision-making process of Shell. Unerman & Bennett (2004) concluded that the facilities offered by the internet for stakeholders do have potential for achievement of greater and more democratic corporate accountability. The case study of Shell and its web forum did not show representativeness of stakeholders, seeing as there was lack of participation by stakeholder groups. It is also unknown how much influence the stakeholders would have had on Shell’s responsibilities and activities even if participation and representativeness would not have been a problem. The facilities offered by the internet, will only be effective if companies are

willing to let public debates influence their actual behaviour and when stakeholder use is widespread and open to other views (Unerman & Benett, 2004).

Stakeholder engagement is providing companies various benefits. The process, however, should initially be beneficial for stakeholders, which is still barely the case. The benefits stakeholder engagement is able to provide for stakeholders is still limited, which is caused by the power companies have in the reporting process caused by the lack of

regulations and legislations. For stakeholder engagement to become meaningful to

stakeholders, legislations and regulations must exist to give stakeholders room to express their needs and expectations and have actual influence on a company’s behaviour. Without official legislations and regulations, the value of stakeholder engagement is determined by the

willingness of companies to change. Section 5 discusses sustainability assurance to increase the benefits sustainability reporting can provide to stakeholders. As mentioned before, the reporting process is in complete control of the company and managerial capture is a concern. The information provided by companies, therefore, can be unreliable and lack credibility.

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5. Sustainability Assurance

The next paragraph gives an introduction to sustainability assurance. It explains why

assurance is needed. This paper only includes the benefits of sustainability assurance, which is relevant for the research question. The process of sustainability assurance itself is not covered on this paper. The literature review is focused on developments of sustainability assurance that lead to benefits to stakeholders.

5.1 Information on Sustainability Assurance

As mentioned before, stakeholders need accurate information for their decision-making and have to make sure they are well informed. According to various literature sources

sustainability reports have been lacking quality and credibility (KPMG, 2013; O’Dwyer & Owen, 2005). Managerial capture makes reports less credible and reliable and causes demand for sustainability assurance. This paper looks at the benefits sustainability assurance is able to provide to identify the value to identify the value of sustainability reports for stakeholders. Research has been done on stakeholders’ needs for sustainability reporting, an

example of this is an article from O’Dwyer, Unerman and Hession (2005) about stakeholders in Ireland. O’Dwyer et al. (2005) concluded from a questionnaire survey that there is a

widespread demand from stakeholders for mandated, externally verified sustainability reports. O’Dwyer & Owen (2005) show concerns about the fact that there is managerial capture. Managerial capture is the concept that management strategically collects information and only report information that boost corporate image, instead of showing transparency and

accountability to the society (Owen et al., 2000). One way to try and counteract this is via sustainability assurance. Without assurance the information disclosed in reports might not be reliable enough for stakeholders to base their decisions on. Unfavourable information can be hidden and information can be manipulated by companies. There has been an increase in companies seeking out assurance services in the past decades (Figure 3.4)

A major concern for the assurance area is the fact that sustainability reporting still varies greatly from company to company because of the lack of standards and

institutionalization in this area except for voluntary guidelines. As a result of this, sustainability assurance is also still in its formative stages.

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Figure 3.4 Growth in assurance since 2002

A bar graph showing trends in sustainability assurance. N100 represents the largest 100 companies in 41 countries. G250 represents the Fortune Global 250 companies. (KPMG, 2013)

5.2 Literature Review Sustainability Assurance

Sustainability reporting assurance services are still a fairly new phenomenon. The increased prevalence of assurance arises from the demand for reliable and credible information from management, for managing the company’s environmental and social risks, and from stakeholders who want assurance that the report truly represents the company’s efforts and achievements.

Ball, Owen & Gray (2000) researched to what extent sustainability reporting assurance promoted transparency and the empowerment of external parties. Ball et al. (2000) argue that due to lack of standards, the assurance process only audits the environmental management system itself. The assurance statements are focused on the quality of the control systems of company instead of the quality of the company’s environmental performance. Assurances therefore do nothing to empower external parties or embrace transparency. The legitimacy of a company’s behaviour seems obtained by having an assurance statement instead of the content of the assurance statement.

Ball et al. (2000) studied 79 reports from companies short-listed for the Association of Chartered Certified Accountants Environmental Reporting Awards (ACCA ERA). These companies are supposed to have the best practices for environmental reports. O’Dwyer & Owen (2005) studied 81 reports from companies short-listed for the 2002 ACCA UK and European Sustainability Reporting Awards. In the reports examined by Ball et al., 45% of the reports mentioned the public, 32% mentioned customers,30% mentioned employees and only 19% mentioned local community. Compared to Ball et al. (2000), in the reports examined by

What is the value of sustainability reporting for companies and stakeholders?