Ownership structure as driver of sustainability reporting assurance : a Western European study

(1)

Ownership structure as driver of Sustainability Reporting Assurance: a Western European study

Name: Ian van Aerschot Student number: 10609288

Thesis supervisor: Edo Roos Lindgreen Date: June 22, 2018

Word count: 12,909

MSc Accountancy & Control, specialization Accountancy & Control (Combined track) Faculty of Economics and Business, University of Amsterdam

(2)

Statement of Originality

This document is written by student Ian van Aerschot 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.

(3)

Abstract

Corresponding with the increasing amount of published Sustainability Reports, the number of companies seeking voluntary assurance on these reports to enhance the credibility of the information also increases. This practice is referred to as Sustainability Reporting Assurance (SRA). Recent literature investigated several internal and external drivers of this practice. The effect of ownership structure is a limitedly investigated driver with opposing outcomes. The focus of this research is therefore on ownership structure, by examining three different aspects of ownership structure in a logistic regression model. Using a sample of 229 Western European listed companies that published a Sustainability Report in 2016, the results indicate that the higher the percentage of shares held by institutional investors, the more likely the companies are to assure their Sustainability Report. This result is in line with the increasing demand of institutional investors for sustainability information and credibility. In this way, the results show that the ownership structure of a company can influence the decision to adopt SRA. On the other hand, no statistically significant relation has been found between SRA and the other measures, namely concentrated ownership, the number of institutional investors and a majority shareholder structure.

Keywords

Sustainability reporting, Sustainability reporting assurance, Ownership structure, Concentrated ownership, Institutional investors, Majority shareholder

(4)

5.1.2 Univariate statistics and descriptive statistics of independent and control variables ... 27 5.2 Multicollinearity ... 30 5.3 Test of hypotheses ... 31 5.3.1 Hypothesis 1 ... 32 5.3.2 Hypothesis 2 ... 32 5.3.3 Hypothesis 3 ... 34 5.3.4 Control variables ... 34 5.4 Robustness check ... 34 5.5 Summary of results ... 36 6 Additional analysis ... 37

7 Conclusion and discussion ... 39

7.1.1 Limitations... 40

7.1.2 Directions for future research ... 40

(6)

1 Introduction

Over the last years, companies have been expanding their reporting practices in the field of sustainability (Branco, Delgado, Gomes and Eugénio, 2014; Simnett and Huggins, 2015). According to the latest Global Reporting Initiative (GRI) database (2018), over 5500 companies published a Sustainability Report worldwide in 2017 compared to around 2600 in 2010. These reports include information regarding the impact of the company on the environment, society and the economy. The increasing amount of sustainability information is published either in separate reports or as part of the annual financial report. The latter is referred to as the practice of Integrated Reporting (Eccles and Krzus, 2010). Several reasons are mentioned for publishing these reports, namely reputation enhancement, meeting the information demands for performance information of investors and commitment to demonstrate an ethical position towards stakeholders (Dando and Swift, 2003). Corresponding with the increasing amount of published Sustainability Reports, the assurance provided on these reports also increases (O’Dwyer and Owen, 2005). By seeking assurance on these reports, the credibility of the information and thereby the usefulness of the reports increase (Simnett, Vanstraelen and Chua, 2009).

According to the latest KPMG Survey (2017), 67% of the world’s 250 largest companies (G250) are seeking assurance on their Sustainability Reports of 2016 compared to 30% in 2005. Although the number of assured reports increases, specific guidelines and requirements for these reports have not yet been established (Braam and Peeters, 2017). In line with this, the scope of the assurance and the assurance providers are differently determined per company. While some companies decide to obtain reasonable assurance on their report, other companies choose for limited assurance. On the other hand, while some companies hire specialized consultancy firms to assure their report, others hire accountancy firms (Ruhnke and Gabriel, 2013).

The decision to assure these reports is investigated by several authors from the companies’ point of view (e.g. Simnett et al., 2009; Ruhnke and Gabriel, 2013; Branco et al., 2014; Casey and Grenier, 2015). These papers examined the effect of internal and external drivers of the decision to engage in Sustainability Reporting Assurance (SRA) and their relationship with the different types of assurance provided and the assurance providers. This is an interesting research field, because the decision to assure these reports is costly and voluntary. Taking these two characteristics of SRA together, the drivers of this decision and the potential

(7)

benefits for companies are increasingly investigated in current literature. According to Kolk and Perego (2009), these benefits can be found in decreased agency costs.

In line with their view on the benefits of SRA, this research focuses on a specific, limitedly investigated driver of SRA, namely ownership structure. By including three different measures of ownership structure and elaborating on their relationship with agency costs and the potential for companies to assure their Sustainability Reports, this research adds to the current research field in several ways. First, a unique database is developed based on the data retrieved from the Thomson One database for all Western European companies that published a Sustainability Report based on 2016 information according to the GRI. Second, the different measures of concentrated and institutional ownership structure used in this research have, to my knowledge, not been examined in relation with SRA. Third, this research provides evidence regarding the relationship of different other well discussed drivers of SRA by including them as control variables.

A sample of Western European companies is used to examine the relationship as indicated above. This sample is used because this region has one of the highest assurance provision rates in the world according to Kolk and Perego (2010) and KPMG (2017). In addition, historically, Western Europe indicated the growing importance of corporate social responsibility already in terms of professional, academic and legislative developments (Adams, Hill and Roberts, 1988). The definition of Western Europe is in line with the definition of the United Nations (UN) and compromises Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Switzerland.

The relationship between ownership structure and SRA is examined based on the following research question: “Does the ownership structure of a company affect the adoption of Sustainability Reporting Assurance?” This question is investigated by testing three different hypotheses. The focus of the first hypothesis is on concentrated ownership and is examined based on the measures used by Demsetz and Lehn (1985). The second hypothesis is examined based on two measures of institutional ownership in line with the definition of the Securities and Exchange Commission (SEC) as stated in rule 13-F. The third measure for ownership structure is the presence of a majority shareholder and is included in the last hypothesis. The findings suggest that ownership structure can influence the decision to engage in SRA. The percentage held by institutional investors present a positive significant relationship with the decision to assure a Sustainability Report. On the other hand, the level of concentrated

(8)

ownership, the number of institutional investors holding shares in a company and the presence of a majority shareholder are not found to be significantly related to the SRA decision. The remainder of this research is structured as follows. Section 2 sets out the theoretical framework relating to Sustainability Reporting (SR) and SRA and the agency theory. Section 3 introduces the three different hypotheses of this research and section 4 describes the research method to test these hypotheses. The results of the analysis are reported in section 5, followed by an additional analysis in section 6. A summary of the results and a discussion are provided in section 7.

(9)

2 Literature review

2.1 Sustainability Reporting

2.1.1 The development of Sustainability Reporting

SR refers to the practice of reporting on the consequences of companies’ decisions that affect the social system as a whole (Carroll, 1999). According to the latest KPMG Survey of Corporate Responsibility Reporting (2017), reporting on corporate responsibility is becoming standard practice for large and mid-cap companies all over the world. In 2016, 90% of the G250 reported on corporate responsibility compared to 45% in 2002 (KPMG, 2017). This development of companies communicating about their corporate responsibility started with early concepts as social audits already in the 1970s (Simnett et al., 2009) and evolved in definition and content over time. This evolution is a response to criticisms that the current financial reports are not able to represent the total corporate value of companies in a changing environment (Simnett et al., 2009). Companies are communicating about their corporate responsibility either in separate reports or as part of their annual report, referred to as Integrated Reporting (GRI, 2015).

The purpose of social audits in the 1970s was to make organizations more transparent and to align the activities of an organization with the interests of stakeholders by reporting on social activities (Zadek and Raynard, 1995). In the 1990s, companies started to report on their environmental impact and the concept of triple bottom line reporting emerged (Simnett et al., 2009). The triple bottom line approach builds on the concept that companies have three key components that they are accountable for and therefore should report on. These reporting matters should focus on the economic, social and environmental performance of the organization (Elkington, 1998).

Nowadays, companies refer to the evolved practices as mentioned above as SR. The GRI (2015) defines SR as a practice that voluntarily discloses the impact of an organization, either positive or negative, on the environment, society and the economy. Other definitions emphasize that SR is not restricted to the financial performance of businesses, but also incorporates non-financial information (Rahman, Hashim and Abubakar, 2010).

2.1.2 Integrated Reporting

Reporting on environmental and social matters is not a new practice as already indicated above. In the early adoption phase, companies reported on these matters along with the disclosure of

(10)

their annual reports (de Villiers, Rinaldi and Unerman, 2014). The rapid development and expansion of these reports resulted in a new way of reporting where companies publish separate stand-alone reports focused on these subjects (Cho, Philips, Hageman and Patten, 2009). Eccles and Krzus (2010) believe that the intention to publish separate reports may be right, however, they state that a stand-alone report decreases the value of the Sustainability Report as well as the value of the financial report. As a response to criticism of this nature, companies started to integrate the Sustainability Report into their annual report resulting in the practice of Integrated Reporting. Integrated Reports therefore provide financial and non-financial information and link these two types of information to reveal the impact of decision making on the short- as well as the long-term (Jensen and Berg, 2012). Since Integrated Reporting and SR are still voluntary in most countries, the types of reports differ. Some companies publish a separate Sustainability Report, some publish an Integrated Report and a financial report and others publish all three (Simnett and Huggins, 2015). While the way of presenting and linking of this non-financial and financial information differs among the companies, the need for assurance in either way is an important area of development. Therefore, all different types of reporting on sustainability information are important and will be considered in this research.

2.1.3 Critical review of literature written on the impact of Sustainability Reporting

The increasing interest in SR is evident, given the increase in published reports and literature. However, while some authors believe that this expanding field of reporting adds value for stakeholders, others are more skeptical about the real purpose of SR. Ballou et al. (2006), for example, state that reporting on non-financial performance measures, as presented in Sustainability Reports, often present a dominant indication of future financial results. On the other hand, Gray (2010) states that business people reporting on sustainability has little or nothing to do with sustainability. He criticizes the purpose and impact that SR has and the empirical meaning it should have for a company. These opposing views are reflected in an ongoing debate about whether SR is creating or destroying value from a stakeholder point of view.

As stated above, the increasing amount of Sustainability Reports is believed to be a response to the criticism that financial reports alone are not able to capture the complete value of companies (Simnett et al., 2009). This is in line with the content of authors demanding disclosure of non-financial performance indicators in order to increase the ability to evaluate

(11)

organizational performance (Kapland and Norton, 1992). De Beelde and Tuybens (2015) add to the research field by stating that incorporating sustainability issues into the reporting practice of a company can result in decreasing long-term investment risks for potential future investors. Besides the positive impact on external stakeholders, other authors emphasize internal advantages. Burrit, Hahn and Schaltegger (2002), for example, mention that SR can function as a set of tools that provides managers with support in decision-making processes by providing extended information on important matters that are useful in achieving targets.

In contrast to these positive views, other papers criticize the value of SR. Gray and Milne (2002) argue that it is not possible to define a sustainable organization, and therefore reporting practice on these matters are the result of self-seeking actions of managers. In accordance with this statement, Burrit and Schaltegger (2010) mention that managers and companies report on these matters due to internal and external pressure. In addition to the critique on the motivation driving the reports, others state that the word sustainability is abused in SR and many reports do not cover what sustainability is really about (O’Dwyer and Owen, 2005).

Despite this criticism, the increase in SR practices and use of this information among stakeholders highlights the urge to increase credibility by providing assurance on the provided information. Therefore, this paper investigates a potential driver of SRA, namely ownership structure, while remaining skeptical on whether this decision is based on the values and long-term goals of the company or as a reaction to meet internal or external pressure.

2.2 Assurance on Sustainability Reports

2.2.1 Introduction of SRA

Corresponding with the increase in companies publishing Sustainability Reports, the assurance provided by third parties on these reports increases as well (O’Dwyer and Owen, 2005). According to the latest KPMG Survey (2017), 67% of the G250 companies are seeking assurance on their Sustainability Reports of 2016 compared to 30% in 2005. This assurance refers to the practice of a third party assuring the sustainability information. However, specific guidelines and requirements are not yet established (GRI, 2015; Braam and Peeters, 2017). Despite the absence of requirements, the assurance provision is believed to result in an increase of credibility of the information provided in a Sustainability Report (O’Dwyer and Owen, 2005; Simnett et al. 2009; GRI, 2015). This credibility emerges due to the decision to voluntarily assure the information (Adams and Evans, 2004). According to Braam and Peeters

(12)

(2017), the absence of requirements regarding SR and SRA results in a voluntarily decision on whether to obtain this assurance and this results in different assurances obtained by companies in terms of, among others, type of assurer and scope of the assurance

2.2.2 Assurance standards

Different initiatives have been undertaken to develop SR frameworks over the last years. These frameworks provide guidance for companies in preparing and presenting their Sustainability Reports and provide stakeholders and assurers with guidance in reviewing the information (O’Dwyer and Owen, 2005). The AccountAbility standards and the GRI standards are two internationally generally accepted standards. The AccountAbility initiative (http://www.accountability.org/standards/) states on their website that “their standards and frameworks support corporations, nonprofits and governments in embedding ethical, environmental and social governance accountability in their organization DNA.” The GRI (https://www.globalreporting.org/) describes their standards on their website as “standards that feature a modular, interrelated structure and represent the global best practice for reporting on a range of economic, environmental and social impacts.”

The AccountAbility vision builds on their AA1000 Series of Standards. These standards rely on the principles of inclusivity, materiality, responsiveness and impact. Inclusivity reflects the participation of stakeholders in sustainability topics and especially in identifying and prioritizing the most relevant topics as part of the materiality principle. Responsiveness relates to the timely and transparent reaction of an organization to material sustainability topics. Finally, the impact is the effect of the organization’s performance on the economy, environment, society, stakeholders or the organization itself. An organization is reviewed based on these principles in order to adopt assurance (AccountAbility principles, 2018). It is important to mention that the scope of the principles, and therefore the assurance, also relies on the processes and people involved in selecting the material metrics and not only on the truthfulness of the numbers. The specific evaluation of stakeholder involvement as part of the assurance process of SR is unique compared to the assurance process of the financial audit.

The GRI published their G4 sustainability guidelines in 2015. The principles underlying these guidelines are divided into two groups: Principles for defining report content and principles for defining report quality. The principles for defining report content are stakeholder inclusiveness, sustainability context, materiality and completeness. Stakeholder inclusiveness

(13)

refers to selecting and implementing the interests of stakeholders and sustainability context is about presenting the performance of the organization in a sustainability context. The principles for defining report quality are balance, comparability, timeliness, clarity, and reliability, where balance refers to the practice of reporting on positive and negative performance and impact of the company as well (GRI, 2015). Most of the quality principles are in line with the IFRS conceptual framework quality principles (IASB, 2018) and again the participation of stakeholders is a distinct and key element in the guidance on SR.

The scope of the assurance provided and therefore the level of the assurance is differently determined for each company. While some companies decide to obtain reasonable assurance, others choose for limited assurance (Ruhnke and Gabriel, 2013). The GRI (2015) refers to reasonable assurance as “high but not absolute assurance” and limited as “moderate assurance” (p. 9). In line with this, Hodge, Subramaniam and Stewart (2009) provided evidence that users of Sustainability Reports placed more confidence in reasonable assured reports compared to limited assured reports. In the remainder of this research, assurance refers to both reasonable and limited assurance.

2.2.3 Assurance providers

SRA providers are independent organizations that evaluate and form a conclusion based on the information in a separate or Integrated Report against suitable criteria in order to enhance the credibility and legitimacy for the intended audience (AccountAbility principles, 2018). According to Perego (2009), 350 different providers produced an assurance statement in 2017. These assurance providers can be divided into three different groups, namely accounting firms (mostly Big 4), certification bodies and specialist consultancies, where the accounting firms dominated the ranking with most provided assurance. The leading role of Big 4 firms in providing assurance is in line with the high quality classification of these firms in existing literature (Francis, 2004). This classification emerged because no single client is important enough to a large auditor to deviate from this high quality and these firms have a reputation to lose resulting in a strong auditor independence, which is an important driver of quality in providing assurance (Perego, 2009). Other authors are more skeptical regarding the role of auditors in providing assurance on these reports. They state that auditors received legitimacy to audit financial statements and moving their symbolic status to new areas, such as Sustainability Reports, might ask for other expertise and capitals than the financial audits (Power, 2003; Andon, Free and Sivabalan, 2014).

(14)

2.3 Drivers of assurance on Sustainability Reports

The need for assurance to increase credibility on Sustainability Reports is evident due to the increase in published reports and usage of the information. To investigate the voluntarily decision to assure Sustainability Reports in more depth, several authors analysed different characteristics of companies, countries and more and their impact on the SRA decision. In order to structure the different drivers of SRA, as indicated in prior research, a distinction is made between internal drivers and external drivers.

Financial performance measures are often mentioned internal drivers of SRA. The size of a company, measured by the natural logarithm of assets (Branco et al., 2014) and total sales of a company (Simnett et al., 2009), is one of the main drivers of SRA. Profitability can be counted as a key driver as well. These measures show a positive relationship with SRA (Ruhnke and Gabriel, 2013; Simnett et al., 2009). The total debt to total assets ratio was used by Branco et al. (2014) to provide evidence regarding a negative relationship between the leverage of a company and SRA. This contradicts with the findings of Simnett et al. (2009), which provide evidence that leverage, measured as long-term debt divided by total assets, does not influence the SRA decision. This difference in evidence is possibly a result of country specific drivers (elaborated in the next indention) since Simnett et al. (2009) use a sample covering 31 countries and Branco et al. (2014) focus on one specific country. Other internal drivers are sustainability, governance and reporting characteristics of companies. Ruhnke and Gabriel (2013) provide evidence that an internal sustainability department positively affects the SRA decision. Casey and Grenier (2015) add to the research field with evidence that the corporate social responsibility performance of a company also positively correlates with SRA. Peters and Romi (2015) focused on the sustainability corporate governance and concluded that firms with a Chief Sustainability Officer and/or Board members with a background in Sustainability are more likely to seek assurance on their Sustainability Reports. Focusing on reporting, experience in SR, higher quality of reports and reports that are in accordance with GRI requirements are positively associated with SRA (Ruhnke and Gabriel, 2013). The majority of external drivers of SRA can be divided into country specific drivers and industry-specific drivers. Companies that operate in a more stakeholder-oriented country (European countries and Japan) and in countries with weaker governance enforcement are more likely to assure their Sustainability Reports (Kolk and Perego, 2010). Simnett et al. (2009) add that companies in stakeholder-oriented countries are also more likely to select auditors to assure their Sustainability Reports. With regard to industry drivers, different authors found opposing

(15)

results. For instance, Simnett et al. (2009) found evidence that companies operating in industries where credibility on information is more important (e.g. utilities, production, mining, and finance industry) are more likely to assure their Sustainability Reports. Casey and Grenier (2015) found that US firms in comparable industries did not significantly seek SRA. They mentioned the strict regulatory oversight in the US as substitute for assurance resulting in this contradiction. Kolk and Perego (2010) acknowledge that different industries did not affect their results. Completely in contrast with country- and industry specific drivers as stated above, Seguí-Mas, Bollas, Helena and Polo-Garrido (2015) conducted a cooperative perspective research, because they identified that most current literature is based on listed firms, and found no evidence for country and industry characteristics as drivers for SRA.

Another driver that is discussed throughout the literature is the ownership structure of a company. Current literature provides contrary evidence regarding the impact of this characteristic. Therefore, this research will provide in-depth evidence regarding ownership structure and its effect on SRA. Branco et al. (2014) analysed ownership structure by dividing a sample into state-owned and privately owned companies but concluded that ownership differences based on this differentiation were not driving SRA differences. However, they did find a difference in the number of companies seeking assurance between listed and non-listed companies. According to Peters and Romi (2015), firms owned by a majority of institutional investors are more likely to assure their Sustainability Reports. Ruhnke and Gabriel (2013) hypothesized that the dispersion of shareholders increased the willingness to adopt SRA due to the increasing agency costs. However, they did not find any significant effect. On the other hand, De Beelde and Tuybens (2015) investigated the dispersion of shareholders the other way around. They focused on the largest shareholder of a company in terms of number of shares and asserted that the lower the ownership percentage of the largest shareholder, the higher the dispersion of shareholders overall. The authors found that companies seeking assurance overall have a higher ownership concentration. The difference in ownership and shareholder structure measurement is evident based on the findings above. This measurement is in my opinion one of the main reasons for different outcomes of different authors regarding ownership. The hypothesis development in chapter 3 will provide more clarity regarding the definitions and measurements of this subject in this research.

(16)

2.4 Agency theory in Sustainability Reporting literature

Most of the literature, as mentioned above, is conducted from an agency theory perspective. From this perspective, social and agent costs incur due to misalignment of interest between the agents of a company and the owners, also referred to as agency costs (Jensen and Meckling, 1976). The agency theory is often used in prior literature to analyse the decisions of companies regarding external assurance on the financial statements (Chow, 1982) and in line with this thinking it is applied to SRA as well.

Since the practice of SRA is voluntary and the costs are high, companies must benefit in some way in order to justify the decision to voluntarily seek SRA. The benefits can be found in decreasing agency costs (Kolk and Perego, 2010). Increasing information asymmetries and conflicts of interests between agents and owners increase the benefit of this external assurance. Multiple drivers, as stated above, affect the assurance because they increase these conflicts and therefore the agency costs associated with them. Originally, the agency conflict with regard to financial reports referred to a conflict between management and investors and creditors. Sustainability Reports provide accountability to internal and external stakeholders and therefore, the conflict of interest affects even more parties (Ruhnke and Gabriel, 2013).

(17)

3 Hypothesis development

Previous research has shown which internal and external factors influence the SRA decision as mentioned in the literature section. This research will focus on a specific factor, namely ownership structure. This factor has been investigated by several authors with different definitions of ownership structure resulting in different outcomes. In the remainder of this section, the definition of ownership structure will be discussed and the hypotheses to facilitate an in-depth investigation of this factor will be introduced.

Ownership structure and its impact on different characteristics and results of the firms are widely investigated in the current literature. Ownership structure is mentioned in different ways in these papers (e.g. corporate ownership structure, shareholder structure, stock ownership structure). The definition of ownership structure in this research is in line with Demsetz (1983), who argues that ownership structure has to be treated as an endogenous outcome of different optimizing decisions. This outcome reflects the influence of different shareholders and of trading on the market for shares. The influence of shareholders and especially whether the organization takes this into account with regard to SRA will be investigated in this research. Different characteristics of the ownership structure and their impact on SRA will be investigated based on the hypotheses that will be introduced in the following sections in order to investigate the following question:

Does the ownership structure of a company affect the adoption of Sustainability Reporting Assurance?

3.1 Ownership concentration and SRA

The first hypothesis will focus on the concentration of ownership. Based on the agency theory, as mentioned in the literature section, concentrated ownership structures will result in less agency costs compared to dispersed ownership as a result of less misaligned interests. According to Demsetz (1983), as the number of shareholders increases, and therefore the ownership structure disperses, the wealth of each will be less dependent on the success of this specific company and it will be more difficult to monitor a company effectively. This is in line with Villalonga and Amit (2006), who expect ownership concentration to reduce the agency conflict between managers and owners in the case of family-owned businesses. On the other hand, it is expected that dispersed ownership increases the agency conflict. Because SRA is a costly decision for firms, and the nature of the decision is voluntary, it can serve as a tool to

(18)

decrease agency costs for firms (Kolk and Perego, 2010). In line with this way of thinking, I expect concentrated firms to be less willing to assure their Sustainability Reports and dispersed firms to be more willing to assure their Sustainability Reports resulting in the following hypothesis:

H1: The concentration of the ownership structure affects adoption of SRA.

3.2 Institutional ownership and SRA

The second and third hypothesis will be in line with the agency theory and the effect of centralized ownership but with the focus on the type of ownership indicated by the type of shareholders. The first type of ownership and its impact on SRA investigated is institutional ownership. The ownership structure of these companies is characterized by the presence of institutional investors. As defined by the SEC in rule 13-F, institutional investors are entities that invest funds on behalf of others and manage at least $100 million in equity. Examples of these investors are bank trusts, insurance companies, mutual funds and pension funds. Other characteristics of institutional investors are frequent trading activities and fragmented ownership (Bushee, 1998). In line with the agency theory, the presence of institutional investors and the fragmented ownership characteristic would result in dispersed ownership on the one hand. The SEC (2017) adds to this by stating that institutional investors depend on the assurance and access to complete and reliable information. Since SR is believed to provide more complete information by increasing the amount of non-financial information (Rahman et al., 2010), firms that are characterized by institutional ownership benefit more, in my opinion, from SRA due to the reasons stated above, resulting in a positive relationship between institutional ownership and SRA. On the other hand, institutional investors focus on short-term developments (Bushee, 1998) and they find it difficult to evaluate long-term value potential for a firm (Porter, 1992). According to Shleifer and Vishny (1990), they mainly focus on easily quantifiable measures in their evaluation. Following the article of De Beelde and Tuybens (2015), the long-term value evaluation potential of SR is a key characteristic of SR. Additionally, the measures of SR are mostly non-financial and less quantifiable compared to financial measures. These arguments might decrease the potential of SR and therefore the benefits of assuring this information, resulting in a negative relationship between institutional

(19)

ownership and SRA. To investigate this relationship in more depth, the following hypothesis will be tested:

H2: The Institutional ownership structure of a company affects adoption of SRA.

3.3 Majority ownership and SRA

The third hypothesis focuses on another ownership structure, namely majority ownership structure. Majority shareholders are individuals or entities owning at least half but less than all of the common stock. The presence of a majority shareholder results in a concentrated ownership structure (Holderness and Sheehan, 1998). In line with the argumentation as stated in section 3.1, this might affect the SRA decision. On the other hand, in line with Kane and Velury (2012), shareholders with substantial influence, like majority shareholders, might heavily monitor firms already resulting in less demand for SRA. This is, in my opinion, in line with the costly characteristic of SRA. Majority shareholders that are heavily involved in decision making and monitoring activities are less willing to obtain costly assurance on Sustainability Reports. This substantiates a negative relationship between majority ownership and SRA. The following hypothesis will be tested to clarify the impact of majority ownership:

(20)

4 Research design

In order to test the hypotheses as stated above, a quantitative research will be conducted with archival data. First of all, the data used and the collection process are described. Second, the different variables used during this research are substantiated. Third, the regression model to answer the hypotheses is elucidated.

4.1 Data sample, selection and collection

4.1.1 Data sample and selection

The sample for this study consists of Western European companies that published a Sustainability Report or Integrated Report in 2016 according to the GRI. The definition used for these reports are therefore in line with the definition of the GRI (2015), namely a practice that voluntarily discloses the impact of an organization, either positive or negative, on the environment, society and the economy. The final sample consists of 229 unique companies. The companies are listed in Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Switzerland. There is not a uniform definition of Western Europe found and therefore the countries have been selected based on the definition of the United Nations (2018).

The focus on Europe relies on the findings of Kolk and Perego (2010) and KPMG (2017), who show that Europe and Japan are the regions with the highest SRA provision. According to Adams et al. (1988), historically professional, academic and legislative developments indicated the growing importance of corporate social accountability in Western Europe. This is in line with the latest KPMG survey (2017), which reports that 82% of the Western European companies reported on corporate responsibilities in 2017. This percentage is considerably larger compared to the Eastern European reporting rate of 65% in 2017. Therefore, given the high reporting rate in Western Europe and the high SRA rate in whole Europe, the SRA practices of these Western European companies are in my opinion an interesting field for further research.

The data is based on reports that include information on sustainability performance in 2016. Most of these reports have been published in the first half of 2017. Additional information from different data sources is based on data from year-end 2016 as well. The focus on one specific year is based on the fact that the ownership structures do not significantly change over time in my opinion and due to the limited amount of time. In line with Seguí-Mas et al. (2015) this research focuses on listed companies because they are highly susceptible to

(21)

sustainability and its disclosure. Furthermore, the required information to investigate the ownership structure is not available nor relevant for most non-listed companies.

4.1.2 Data collection

In order to examine the effect of ownership structure on SRA, multiple databases are used. Fundamentally, to compile the first sample, the GRI provided their own database containing historical data about all firms that published Sustainability Reports and Integrated Reports from 1999 until 2017. The database is divided per year and contains information regarding the type of firm and type of report published with additional information on assurance provision and company related information. Initially, 295 listed firms, either reporting a Sustainability Report or Integrated Report, were gathered from the GRI database. Thereafter, relevant information regarding the ownership structure and other variables for each firm were retrieved from Thomson One and Compustat and manually from companies’ financial statements and websites.

The ownership structure information is collected from Thomson One. This data has been hand-collected per firm at year-end 2016. This data contained all known shareholders and their percentage of stake in a specific company together with an investor classification per shareholder. This data was available for 235 companies. Finally, company-specific financial and non-financial data has been retrieved from Compustat and manually from the companies’ financial statements and web pages. After deleting the outliers, from which less than 1% of the total shareholders were known, the final sample consisted of 229 firms.

The use of these different data sources resulted in three different data files. The data sources of the GRI and Compustat contained company-specific information and were merged based on company codes. The Thomson One data source, however, consisted of over forty thousand rows with one firm and one shareholder including additional information per row. This data is linked with the Wharton company code database in order to include the relevant company codes included in the merged GRI and Compustat file. Afterwards, multiple formulas have been included in the database in order to summarize the relevant ownership structure variables per company. These variables will be elucidated in the following section.

4.2 Variables

In this section, the variables needed to investigate the relation between ownership structure and SRA will be introduced. First, the dummy variable for SRA will be introduced. Second, the six variables constructed from the Thomson One database will be introduced and substantiated.

(22)

Third, the control variables as indicated in prior research will be introduced and one unique, to my knowledge, control variable will be included.

4.2.1 Dependent variable

The dependent variable in this research is the binary variable for SRA. This dummy variable is used to test all three hypotheses as stated in chapter 3. The dummy variable equals 1 if company i assured their Sustainability Report and equals 0 if no assurance is provided. The assurance provision is in line with the definitions of the GRI (2015) and is obtained either on a separate report or on a Sustainability Report as part of an Integrated Report. The assurance provision contains limited as well as reasonable assurance.

4.2.2 Independent variables

To assess the influence of ownership structure on SRA, data from Thomson One was used to calculate and construct six different variables. Three variables are used to test the effect of concentrated ownership on SRA. Two variables are used to test the influence of institutional investors, while one variable is included to measure majority ownership. These variables are explained in more detail in the remainder of this section.

The first measure of ownership structure, concentrated ownership, is reflected in three different variables that distinguish concentrated ownership firms from dispersed ownership firms. The variables are measured following Demsetz and Lehn (1985), and used by Perrini, Russo and Tencati (2008) and Demsetz and Villalonga (2001) and equal the logit transformation of ownership of the five largest shareholders, twenty largest shareholders and the approximation of the Herfindahl index of a company. Demsetz and Lehn’s (1985) transformation of the percentage of the three measures, as indicated above, results in the transformation from bounded variables into unbounded variables. These variables are calculated using the formula

log Percentage

100−Percentage .

The second measure for ownership structure, institutional ownership, is reflected in two different variables that indicate the degree of presence of institutional investors in a company. The first measure reflects the percentage of shares held by all institutional shareholders to the total number of shares outstanding following Kochhar and David (1996). In line with the measure used for concentrated ownership and different from Kochhar and David (1996), this research will conduct a logarithmic transformation to unbound the variable. The second

(23)

measure reflects a count of the institutional shareholders. This variable is included because a high number of different institutional shareholders indicates that, on average, shareholders hold relatively lower shares resulting in a dispersed ownership structure. Dispersed ownership structure can result in increased agency costs and therefore, the number of institutional investors holding shares in a company is included in the statistical model. The data used from Thomson One contained investor type descriptions, these are converted to either an institutional or a non-institutional classification based on the definition of institutional investors from Thomson One and the definition of the SEC as stated in rule 13-F, where this research included entities that invest funds on behalf of others. The remainder of the definition of the SEC involves the amount invested by the entities, this is not considered in this research, because the database containing this information was not available.

The third and last measure for ownership structure, majority ownership, is reflected in one dummy variable. Following Holderness and Sheehan (1998) and in line with the definition of majority ownership as stated by the International Accounting Standards Board (IASB) (2018), majority shareholders own more than 50% of the outstanding stock. In this research, a dummy variable is used to reflect the presence of a majority shareholder. The dummy variable equals 1 in case of the presence of a majority ownership structure and 0 if no majority shareholder is present.

4.2.3 Control variables

Based on the existing literature as outlined in section 2.3, several control variables have been used in this research and one unexplored control variable, to my knowledge, is included, namely the number of employees. The different control variables will be explained divided in internal and external drivers of SRA.

Internal company drivers, such as financial and non-financial performance, are the most investigated drivers of SA in current literature. Four different drivers of SRA will be included as control variables in this research. First, the size of a company will be included. The first variable follows the research of Simnett et al. (2009) and Branco et al. (2014), who use the natural logarithm of total assets and the total sales. To avoid multicollinearity, this research included the total sales only, but took the natural logarithm of this variable as used by Branco et al. (2014). Second, the profitability of a firm will be included following Simnett et al. (2009) and Ruhnke and Gabriel (2013). Profitability will be included as return on assets (ROA). In line with the reasoning of Kolk and Perego (2010), who state that the costly nature of the

(24)

voluntary decision for SRA is likely to result in firms assuring their Sustainability Reports when they have earned enough profit, these papers provided evidence for a positive relationship between profitability and SRA. Third, leverage will be included as control variable as ratio of long-term debt to total assets following Casey and Grenier (2015). This control variable is interesting, since current literature provides evidence on opposing views as stated in section 2.3. Fourth, the number of employees will be added as unexplored control variable. The impact of stakeholders on the SRA and SR decision is mentioned by several authors. Spence, Schmidpeter and Habisch (2003) state that the stakeholder theory is the most dominant and useful theory in explaining the SR practice. The stakeholder theory emphasizes the importance of other stakeholders next to shareholders, such as suppliers, customers, the local community and employees (Freeman, 2001). In my opinion, employees are becoming more aware of the impact of organizations and consider this impact when deciding to enter into a job or not to leave a job. Therefore, I believe that accountability on Sustainability Reports will become increasingly more important for employees, which makes it an important driver of SRA. As external control variable, the type of industry will be used following Simnett et al. (2009). They found evidence that the mining, production, utilities, and finance industries were positively correlated with SRA because these industries face a greater incentive to increase user confidence and therefore increase the credibility of provided information (Simnett et al., 2009). Industry will be included as dummy variable, where a value of 1 is allotted for industries evidenced as positively related to SRA and 0 as other industries.

4.3 Statistical model

To test the three hypotheses as formulated in chapter 3, the following logistic regression model is estimated:

SRAi = 𝛼i + 𝛽1*TOPFIVEi + 𝛽2*TOPTWENTYi + 𝛽3*HERFINi + 𝛽4*INSTIi + 𝛽5*CNT_INSTIi + 𝛽6*MAJORi + 𝛽7*SALESi + 𝛽8*PROFIT i + 𝛽9*LEVERAGEi + 𝛽10*EMPLOYEESi + 𝛽11*INDUSTRYi + Error term

(25)

Where, for company i:

The choice to run a logistic regression model depends on the nature of the dependent variable in this study, which is a binary number that equals either 1 or 0. This is in line with Simnett et al. (2009), Branco et al. (2014), and Ruhnke and Gabriel (2013). Using this regression results in a logarithmic transformation of the dependent variable. This transformation generates a probability distribution for the occurrence of the event of seeking assurance on a Sustainability Report within the interval [0.1] (Ruhnke and Gabriel, 2013).

SRA Is the dependent variable that equals 1 if their Sustainability Report is assured and 0 if not

TOPFIVE Logarithm of the percentage of shares owned by the five biggest shareholders

TOPTWENTY Logarithm of the percentage of shares owned by the twenty biggest shareholders

HERFIN Logarithm of the total percentage of shares transformed to the Herfindahl index

INSTI Logarithm of the percentage of shares owned by institutional investors

CNT_INSTI Number of institutional investors holding shares

MAJOR Dummy variable indicating the presence of a majority shareholder (1) and no majority shareholder (0)

SALES Natural logarithm of total sales

PROFIT Profit measured as return on assets (ROA)

LEVERAGE Leverage measured as long term debt divided by the total assets EMPLOYEES The total number of employees

INDUSTRY Dummy variable indicating operations in an industry correlated with SRA according to Simnett et al. (2009) (1) and all other industries (0)

(26)

5 Results and analysis

In this section the results based on the statistical model will be presented. First, descriptive statistics and univariate analyses regarding general and included variables will be conducted. Second, a multicollinearity test will be conducted in order to create the final model to test the hypotheses in the following section. Finally, a summary of the results will be presented 5.1 Univariate analysis and descriptive statistics

5.1.1 Univariate analysis and descriptive statistics of general variables

The sample used in this research to test the three different hypotheses contains data from seven countries. From the 229 different companies, 108 (47%) were listed in France, 33 (15%) in Switzerland, 32 (14%) in the Netherlands, 28 (12%) in Germany, 14 (6%) in Belgium, 10 (4%) in Austria and 4 (2%) in Luxembourg. With regard to the industry, 102 companies were participating in an industry that was defined as an industry more likely to seek assurance by Simnett et al. (2009), namely utilities, production, mining, and finance industry. Out of the total sample, 81 (35%) firms had their Sustainability Report assured in 2016. This shows that the majority of the companies did not seek SRA. This contradicts with the report as published by KPMG (2017), which stated that 65% of their total sample of the G250 applied SRA. However, this difference can be substantiated by that fact that they focus on the 250 largest companies. Branco et al. (2014) and Simnett et al. (2009) showed that the size of a company is one of the main drivers of SRA with a positive correlation. Because the sample used in this research includes all the listed firms as included in the GRI database, this research also included small listed firms, which might be an important reason for the difference in total assurance. In terms of assurance, the different countries show a wide range of coverage. In France, 20 (19%) reports were assured, while in the Netherlands 23 (72%) of the reports were assured. Table 1 contains the distribution of the number of assured and not assured differentiated by country.

The GRI database also provides additional information regarding the assurance obtained per company. Of the 81 assured reports, 55 companies had their report ‘limited / moderate’ assured. Only eight companies assured their Sustainability Report ‘reasonable / high’, which is defined as a high but not absolute form of assurance by the GRI (2015). A total of 14 companies did not mention the level of assurance in their report, while four companies assured their report with a combination of ‘limited / moderate’ and ‘reasonable / high’. According to the GRI (2015), the combination of assurance is a result of cost constraints and

(27)

other feasibility issues, where companies decided to reasonably assure the matters that are most important to them and limitedly assure the other matters. From all the reports, 68 reports were assured by accounting firms (67 by Big 4 accounting firms), three by certification bodies and ten by consultancy companies. PricewaterhouseCoopers dominates the Western European market of SRA, as they assured 23 of the reports.

5.1.2 Univariate statistics and descriptive statistics of independent and control variables

Descriptive statistics regarding the independent variables are presented in Table 2 in total and in Table 3 divided based on the dependent variable. In total, the percentage of shares held by the top five shareholder varies between 8.26% and 97.36% and the top twenty varies between 14.82% and 97.36%. The maximum percentage shares held is equal between these two measures due to the ownership structure of a family-owned company. The Herfindahl index varies between 0.0018 and 0.8555. These three measures for ownership structure all show a higher mean for non-assured companies compared to assured companies as shown in table 3. The percentage of shares held by institutional investors varies between 0.85% and 74.57%. The percentage of shares held by institutional investors is 27.40% for companies that did not assure their Sustainability Report and 33.87% for companies that did. From the total 229 companies, 53 (23.24%) ownership structures contained a majority shareholder. Once divided, 36 (24.32%) non-assured companies and 17 (20.98%) assured companies had a majority shareholder. The percentages as mentioned in this section are included as logarithmic measures as explained in chapter 4. However, in order to enhance the understandability of the total data sample the percentages are mentioned in this section.

Table 1 SRA divided per country

Country Assurance provided No Assurance Total

Austria 6 (60%) 4 (40%) 10 Belgium 6 (43%) 8 (57%) 14 France 20 (19%) 88 (81%) 108 Germany 16 (57%) 12 (43%) 28 Luxembourg 2 (50%) 2 (50%) 4 Netherlands 23 (72%) 9 (28%) 32 Switzerland 8 (24%) 25 (76%) 33 Total 81 (35%) 148 (65%) 229

(28)

Table 2 Descriptive statistics independent variables

Variable Obs. Mean Std. Dev. Min Max

TOPFIVE 229 0.4501 0.2173 0.0826 0.9736 TOPTWENTY 229 0.5606 0.1909 0.1482 0.9736 HERFIN 229 0.1466 0.1725 0.0018 0.8555 INSTI 229 0.2975 0.1670 0.0085 0.7457 CNT_INSTI 229 144.3974 88.9595 1 409 MAJOR 229 0.2314 0.4227 0 1

Table 3 Descriptive statistics independent variables divided by assurance classification

Variable Assurance Obs. Mean Std. Dev. Min. Max.

TOPFIVE 0 148 0.4681 0.2140 0.0826 0.9736 TOPFIVE 1 81 0.4171 0.2207 0.0898 0.8956 TOPTWENTY 0 148 0.5761 0.1849 0.1482 0.9736 TOPTWENTY 1 81 0.5321 0.1995 0.1596 0.9166 HERFIN 0 148 0.1551 0.1701 0.0018 0.8555 HERFIN 1 81 0.1309 0.1767 0.0027 0.7428 INSTI 0 148 0.2740 0.1659 0.0085 0.7386 INSTI 1 81 0.3387 0.1620 0.0195 0.7457 CNT_INSTI 0 148 126.5676 83.3231 1 320 CNT_INSTI 1 81 176.9753 90.1904 5 409 MAJOR 0 148 0.2432 0.4305 0 1 MAJOR 1 81 0.2098 0.4098 0 1

(29)

The descriptive statistics of the control variables are presented in Table 4 and Table 5, in which Table 4 presents the totals and Table 5 divides the totals based on the assurance classification. The average ROA is 3.09%. Once divided, the ROA for companies that obtained assurance is higher compared to non-assured SR companies, namely, 3.62% and 2.80%. The leverage ratio also deviates between the two different groups, where the leverage ratio is 18.18% for assured and 16.38% for non-assured companies compared to an overall average of 17.02%. The total sales and total employees per company are also higher for companies that sought SRA. These measures are presented in their original state in the tables below, however, in the statistical model they are measured as the natural logarithm. On average, 44.54% of the firms participated in an industry that is positively correlated with SRA according to Simnett et al. (2009), namely utilities, production, mining, and finance industry. This percentage was 58.02% for assured companies and 37.16% for non-assured companies.

Table 4 Descriptive statistics control variables

Variable Obs. Mean Std. Dev. Min Max

PROFIT (ROA) 229 0.0309 0.0843 -0.7287 0.5424

SALES (in millions €) 229 15327.61 30358.11 0.2840 221308.80 LEVERAGE (LT Debt/ Assets) 229 0.1702 0.1305 0 0.9271

INDUSTRY 229 0.4454 0.4981 0 1

EMPLOYEES 229 42506.79 73203.39 16 626715

Table 5 Descriptive statistics control variables divided by assurance classification

Variable Assurance Obs. Mean Std. Dev. Min. Max.

PROFIT (ROA) 0 148 0.0280 0.1009 0.7287 0.5424

PROFIT (ROA) 1 81 0.0362 0.0387 0.1120 0.1441

SALES (in millions €) 0 148 8615.31 16135.20 0.28 127326

SALES (in millions €) 1 81 27592.08 43732.94 148.75 221308

LEVERAGE(LT Debt/Assets) 0 148 0.1638 0.1360 0.0000 0.9271 LEVERAGE (LT Debt/Assets) 1 81 0.1818 0.1198 0.0000 0.5359 INDUSTRY 0 148 0.3716 0.4849 0.0000 1 INDUSTRY 1 81 0.5802 0.4966 0.0000 1 EMPLOYEES 0 148 30271.72 51496.43 16.00 325820 EMPLOYEES 1 81 64862.25 98064.32 70.00 626715

(30)

5.2 Multicollinearity

In order to test the hypotheses, a logistic regression model is tested. This analysis can be classified as a multivariate analysis, which requires no potential multicollinearity between the independent variables (Ruhnke and Gabriel, 2013). Therefore, the independent variables are tested on multicollinearity with the Variance Inflation Factor (VIF). The results are shown in Table 6. There is not one general VIF value accepted in current literature, therefore, in order to exclude as much multicollinearity as possible, this research accepts the lowest acceptable VIF found in previous research. This value is based on the research of Ringle, Wende and Becker (2015), who accept a VIF value of 5. Using this value as threshold, results in multicollinearity problems between four variables. Because the statistical model requires no multicollinearity, the correlated variables are excluded and an adjusted statistical model is tested.

First, the multicollinearity between the three measures of concentrated ownership is excluded by only using the percentage held by the five largest shareholders. Second, the multicollinearity between SALES and EMPLOYEES is eliminated by excluding the control variable EMPLOYEES. Although I still believe that the impact of employees on the SRA decision is interesting and should be investigated more in depth, the control variable SALES will not be ejected based on evidence of prior literature (e.g. Branco et al., 2014; Simnett et al., 2009). This results in the VIF values as presented in Table 7, which are below the accepted value of 5 and therefore suitable to be used in the final statistical model as stated below: SRAi = 𝛼i + 𝛽1*TOPFIVEi + 𝛽2*INSTIi + 𝛽3*CNT_INSTIi + 𝛽4*MAJORi + 𝛽5*SALESi + 𝛽6*PROFIT i + 𝛽7*LEVERAGEi + 𝛽8*INDUSTRYi

Table 6 VIF outcome of statistical model 1

Variable VIF 1/VIF

TOPFIVE 41.59 0.024044 TOPTWENTY 16.95 0.059008 HERFIN 15.77 0.063431 SALES 5.37 0.186142 EMPLOYEES 4.17 0.23963 COUNT_INSTI 3.86 0.259218 INSTI 2.41 0.415064 MAJOR 2.38 0.419697 INDUSTRY 1.16 0.864867 PROFIT 1.14 0.879748 LEVERAGE 1.09 0.915765 Mean VIF 8.72

(31)

5.3 Test of hypotheses

Table 8 shows the results of the logistic regression analysis that examines the relation between ownership structure and SRA for three different measures. The results show no significant relation between the measure of concentrated ownership, majority ownership and the count of institutional investors. However, this research does find evidence that firms with higher institutional ownership percentage are more likely to adopt assurance on their Sustainability Reports. In the remainder of this section, the results per hypothesis are elaborated.

Table 8 Result of logistic regression

* Significant on the 10% level ** Significant on the 5% level *** Significant on the 1% level.

Table 7 VIF outcome of statistical model 2

Variable VIF 1/VIF

CNT_INSTI 3.79 0.263949 TOPFIVE 3.1 0.322307 SALES 2.6 0.385228 MAJOR 1.92 0.521372 INSTI 1.83 0.546874 INDUSTRY 1.14 0.873996 PROFIT 1.11 0.897617 LEVERAGE 1.09 0.916369 Mean VIF 2.07

Variable Coefficient Std. Dev. Z value P-Value [95% Conf. interval]

TOPFIVE 0.230 0.627 0.370 0.714 -0.999 1.459 INSTI 0.987** 0.499 1.980 0.048 0.008 1.965 CNT_INSTI -0.001 0.004 -0.130 0.893 -0.008 0.007 MAJOR 0.419 0.531 0.790 0.430 -0.622 1.459 PROFIT 1.870 2.788 0.670 0.502 -3.594 7.335 SALES 0.344** 0.146 2.360 0.019 0.058 0.630 LEVERAGE 1.178 1.187 0.990 0.321 -1.149 3.506 INDUSTRY 0.749** 0.327 2.290 0.022 0.109 1.389 CONSTANT -8.445*** 2.891 -2.920 0.003 -14.111 -2.779

Logistic regression Number of observations 229

LR chi2(8) 37.83

Prob > chi2 0.000

(32)

5.3.1 Hypothesis 1

The results for the Western European sample, as stated in Table 8, show no significant association between companies that have a higher concentrated ownership structure and SRA. In line with the agency theory, this research expected more concentrated ownership to be negatively correlated with SRA, because the more dispersed the ownership structure, the higher the agency costs (Demsetz, 1983; Villalonga and Amit, 2006) resulting in a higher potential of SRA. However, the measure of the biggest five shareholders show a positive coefficient between these two factors. This contradicts my reasoning based on the agency theory. As indicated in the multicollinearity section, two other measures for ownership structure are excluded due to the correlation between the three measures as used by Demsetz and Lehn (1985), namely the twenty biggest shareholders and the Herfindahl index. In two separate models, the association between these measures and SRA is examined to test whether these measures provide different evidence compared to the five biggest shareholders (not tabulated). The coefficients of the two measures and the P-values are comparable with those from the measure used in the main statistical model. This is in line with the high multicollinearity between the measures. Therefore, the null H1 is not rejected and no evidence has been found for a correlation between the degree of ownership structure and the SRA decision.

5.3.2 Hypothesis 2

The results show significant evidence, on a 5% level with a positive coefficient, for a relation between the percentage held by institutional investors in a company and SRA. On the other hand, no significant evidence has been found for a relationship between the number of institutional investors holding shares in a company and seeking assurance on Sustainability Reports. In my opinion, the rejection of a relationship between the count of institutional investors in a company and SRA is in line with the conclusion of H1. The higher the number of institutional investors in a company, the more dispersed the ownership structure of a company. Therefore, this conclusion does not deviate from earlier evidence. The percentage held by institutional investors is positively correlated with a P-value of .048. This is in line with Peters and Romi (2015), who provided evidence between institutional shareholder ownership and SRA based on a dummy variable of 1 when the ownership structure was dominated by institutional shareholders and 0 if not. This research adds to the research field by incorporating a different measure for institutional ownership, namely, the total percentage held by institutional investors. According to Peters and Romi (2015), these findings are consistent

(33)

with the increasing demand for sustainability information by institutional investors and increasing demand for credibility on reports.

Due to the increasing presence of institutional investors around the world since the 1990s (Ferreira and Matos, 2008), together with the increasing participation of these investors also referred to as institutional shareholder activism (Gillan and Starks, 1998), the pressure to meet the demands of these investors is becoming more important for firms (Farooqi, Jory and Ngo, 2017). Peters and Romi (2015) mention the increasing demand for sustainability information as a driver of the relation between institutional investors and SRA. Recently, De Nederlandsche Bank (DNB) published a report in line with this thinking. They focused on a particular institutional investor, namely, pension funds, and evidenced a trend in sustainable investment funds for this group. The pension funds are increasing their focus on sustainability performance relating to for example climate change, food security and health issues when evaluating a company (DNB, 2016). In order to take these performances into consideration when making an investment decision, these pension funds need access to complete and reliable information regarding these topics in line with the argument of the SEC (2017). By assuring this information, the credibility of the information and therefore its usefulness increases (O’Dwyer and Owen, 2005). Altogether, the arguments above all substantiate the positive significant relation between institutional investors and SRA.

In my opinion, the effect of institutional investors on SRA might be a result of a double agency conflict. The main characteristic of an institutional investor, based on the definition of the SEC (2017), is that they invest on behalf of others. Therefore, agency costs can arise between the institutional investors and the investors they are representing and between the institutional investor and the company they invest in. According to Kolk and Perego (2010), SRA can serve as a tool to decrease agency costs. Therefore, I believe that, based on the definition of an institutional investor, resulting in two-sided agency costs, the potential benefits of SRA increases in terms of a tool to decrease agency costs.

Thus, this research provides evidence that the presence of institutional investors positively correlates with the decision to seek SRA The number of institutional investors does not affect this decision in line with H1 and therefore, I believe that specific characteristics and demands of institutional investors are urging companies to assure their Sustainability Reports. The larger the percentage held by institutional investors, the more pressure companies are facing to meet these demands and therefore seek SRA.