Integrated reporting in Italy : a focus on the implementation of the IIRC framework in the Italian companies : a comparative analysis

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FACULTY OF ECONOMICS AND BUSINESS

MSc Accountancy and Control

Integrated Reporting in Italy

A focus on the implementation of the IIRC Framework in the

Italian companies:

A comparative analysis

Student name: Marco Plos

Student number 10622624

First Supervisor: Prof. Dr. Brendan O‘Dwyer

Second Supervisor:

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Abstract

The development of the so called Integrated Reporting was sudden and impetuous; it has affected the worldwide reporting scenario and more advanced economies are now starting to implement this new way of accounting.

This paper analyzes the development of the IR in Italy through a comparative analysis of the reports of the two biggest Italian companies adopting it: Eni and Generali.

After an overview of how IR originated and developed, Institutional theory is explained and it is shown how this theory serves for a better understanding of how IR is spreading and revolutionizing the actual reporting practices.

The findings depict a good level of ―implementation‖ of the IIRC Framework and also a lot of commitment in respecting the guidelines.

Although the process appears to have had a good start, complete achievement of the objective of Integration still requires further steps.

Considering that IR is said to be the future of reporting, the fact of being a first-mover in the case of Generali and Eni will help them in building a competitive advantage with respect to the laggard firms.

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Acknowledgments

The thesis usually represents the last effort for obtaining a Master Degree. For me it represents much more. It is the final piece of a year in Amsterdam, which is a new city that I learned to love and appreciate. During this period I came into contact with

many new people and experiences that made me a richer person.

For successfully completing this course of study I have to be thankful to everybody who in one way or the other helped me in feeling comfortable and beloved during this year. However some people deserve a special mention. I have to thank my neighbours Daria, ,

Karim, Laura, Robbie and Nikoletta for having made pleasant the days passed in Zuiderzeeweg. Even though this residence is particularly dark from the outside, you

managed to light up every moment that we passed together.

A lot of time obviously was dedicated to University, and thanks to Kasia, Paul, Nadine and Fabian I enjoyed every single moment spent at UvA.

All the people who visited me from Italy (and not only) were simply great. I would like to mention everybody of you but you are really too many. You made the motto “you can take

away an Italian from Italy, but you will never take away Italy from an Italian” come true and I cannot express how much I am grateful for that.

For successfully completing a thesis the help of a supervisor is necessary. Therefore I want to thank Mr. O’Dwyer for the patience and for having taught me how to be rigorous and precise in writing a dissertation. This thesis was also possible thanks to the politeness of the people who accepted to be interviewed. As a consequence I am extremely grateful to Domenica, Raffaella, Annamaria, Nicola and Michela for having accepted to sacrifice their

time in order to answer to my questions.

Finally I want to thank my parents, Loriana and Paolo. Without them this experience would have not been possible. There are no words for expressing the importance of your

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Chapter 1 INTRODUCTION

There are events in the course of History which have such a huge impact, that their consequences last and influence the behavior and the actions of societies indefinitely. Napoleon conquered almost all continental Europe but after a decade his regime was defeated and the ―old order‖ was re-established in Europe through the so-called ―Restoration‖. Apparently everything was almost as before but the effect of this short domination would have lasted forever in all the countries conquered by France. First of all with the Code Civil the Napoleonic domination changed forever all the legislative systems, making them switch from middle-ages based codes to modern and organic codes of laws. Then there was the introduction of cadaster, which gave a clearer and transparent footprint to all the urbanization processes. Moreover Napoleon introduced one of the first forms of State in which religion was not interfering with the political life of the nation. As French domination was such a full-of-consequences event for Europe in the XIX century, the financial crisis of 2008 can be considered also an event that shaped behaviors and institution, even if nowadays the world Economy seems to be on the right track for recovery.

The hidden and long-lasting ―gifts‖ that the crisis left to us are many: an ethical questioning of the role of Finance in nowadays economy, an increased desire of various stakeholders to be more considered by corporations, some changes in the responsibilities of accountants (Humphrey et al., 2011), new regulations (e.g. the famous Sarbanes Oxley act) and the update of many corporate governance codes (e.g. the COSO). Another issue is the necessity to introduce a new model of reporting (Wild and van Staden, 2013; Hanks,Gardiner, 2012; Eccles and Krzus, 2010), which contains not only financial figures, but also environmental perspectives and future forecasts about firm‘s performance. This concept is not new, since the first Integrated Report was produced in 2002 in Denmark by the pharmaceutical

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company Novo Nordisk. Immediately after the crisis this topic was treated with more urgency, especially due to the fact that there is a need for a uniform framework for IR. Integrated Reports differ from normal reports since they comprise both financial and non-financial information, in order to give a more holistic picture of the company‘s situation. IR includes also future forecasts, analysis of the relations with stakeholders and insights about the efficiency of the corporate governance of the firm (Krzus 2011).Even if the first IR was published in 2002, guidelines about how to do an Integrated have not been available until the end of the first decade of the 2000s, with the so called KING III (2009) and the IIRC Framework (2011). As for KING III, it‘s a document issued by the South African Government, in which they require South African listed companies to produce Integrated Reports, instead of the ―classical‖ ones. After that, in 2010 IIRC (International Integrated Reporting Committee) was founded in order to promote the implementation and a common set of accounting standard for the effective diffusion of the Integrated Reporting; this institution launched in 2011 the ―IIRC Pilot Programme‖ in order to underpin the development of the International Integrated Reporting Framework. Around 100 firms of many different countries have adhered to this project, demonstrating on one side an increasing societal willingness in taking care more and more of the different interests of the various stakeholders and on the other side the belief that such a holistic report, which includes also future perspectives, may improve also the firm‘s gesture and results.

This research focuses on the practical implementation of the IIRC Framework considering the cases of Eni and Generali, which are the two biggest Italian companies implementing the IR. The implementation process is analyzed through the lens of the Institutional theory and it covers the reasons, the advantages and the problems related to the practical implementation of this Framework.

1.1 Research objectives and questions

The purpose of this paper is to study and analyze how the IIRC Framework ideals are put into practice, considering two Italian practical cases. It explores the reasons that pushed these two companies to follow the route toward integration. Moreover, it aims at

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understanding whether the IIRC Framework is a useful and practical tool for implementing IR and what are its advantages.

Past research looked at the macro-factors that are pushing toward Integrated Reporting, but only on a broad level (e.g. Berg & Jensen 2011, Dragu & Tiron-Tudor 2013). Not much is known about IR at a firm-specific level and the expected benefit deriving from adoption of the Framework of IIRC.

Therefore, this study investigates why companies are taking part in the IIRC Pilot Programme and the reasons for which they consider that adhering to this Programme helps them in the preparation of the Integrated Report.

RQ1:Which are the driving factors that pushed companies to adopt the IIRC Framework and what are the expected advantages to the companies as a result of the partnership with

IIRC

Moreover, this research examines whether the Framework is actually put into practice and the extent to which integrated report adheres to this Framework. The following research question is formulated according to the paper ―The International Integrated Reporting Framework: Key Issues and Future Research Opportunities‖ (Cheng et al. 2014), which calls for future research regarding the implementation in practice (pag. 100 of the paper) of this new form of reporting.

RQ2:To what extent have the reporting ideals implemented by Generali and Eni been put in to practice and how adherent is their report to the Framework

Considering the documental analysis required by this research question, in order to answer to the study of Wild and van Staden is taken as a model. Their research is a descriptive analysis of the IRs available in the IIRC database, having as a main goal the compare the guidelines of the Framework and their factual implementation in the reports. Even though the current study is based on the aforementioned one, it differs by having a more in depth approach and it will also examine the motives for eventual omissions.

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1.2 Research Method

This research has a comparative approach regarding the practical issues, problems and eventual concerns related to the implementation of the IIRC Framework in two Italian firms. Due to the setup of this study qualitative methods are used, namely interviews and content analysis. Interviews with the responsible of the companies for IR have been conducted as well as the analysis of the Integrated Reports, comparing them to the standards expressed in the IIRC Framework. Furthermore the previous IRs (in the case of Eni) are taken into consideration and also new techniques (app for smartphones etc.) adopted for a better diffusion of the report will be considered into this essay.

The analysis of the material acquired through the interviews, was conducted according to the procedure described in the paper ―Qualitative Data Analysis: Illuminating a Process for Transforming a ―Messy‖ but ―attractive‖ ―Nuisance‖‖, written by Brendan O‘Dwyer. This paper was choose and implemented in this research for its rigor and its practical and easy-understandable approach.

However it was put a lot of effort in making this Research ―interesting, easy to navigate and

(if possible) exciting to the reader‖ (Bansal, Corley 2011; brackets added) since conciseness

and readability are features that are not less important than rigor in qualitative research essays.

1.3 Theory and Literature Review

The theoretical section is divided in two parts. First, a general literature review of the development and diffusion of the practices of environmental and social accountability is given, such as full-cost accounting (Herbohn 2005, Antheaume 2004), balanced scorecards (Deegan&Blomquist 2006), GRI Principles and code of auto-regulation, both among group of firms (like the Equator Principles; O‘Sullivan, 2010) or at a single-firm level (Compa,

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2004). In the next step the focus is on the South African experiment of IR (KING III) and how it has affected the rules and the practices for IR. Finally the so called ―emergency‖ for integrated reporting is treated. The goal of this part is to make the reader aware of the historical background of IR, in order to fully understand why it is considered so revolutionary (if compared with the previous practices of social accountability) and also to understand the differences between the Framework of IIRC with all the other previous forms of social reporting.

The second part of the theory focuses on the theoretical background of the IIRC Framework, which has the basis for its diffusion in the Institutional Theory. After a general introduction on the theory, the Institutional Realm of Burns and Scapens is used to explain under a theoretical lens how IR is spreading and becoming a routine, both in a societal and in a firm level.

1.4 Research Contribution

This paper aims to fill an actual gap in the present literature, regarding the practical implementation of the IIRC Framework. As mentioned before, this paper responds to a call in the accountancy literature for a focus on the real-business-life issues (Cheng, Green, Conradie, Konishi, Romi, 2014)1. Another objective is to give insights into the way firms try to comply with this new Framework.This thesis also aims to follow the footsteps of the work of Wild and van Staden (2013), regarding how much firms are putting into practice the ideals of IR. While the aforementioned paper has a more general approach, the current study follows a firm specific analysis.

Moreover the choice of Italian companies is not casual, since there is a huge literature gap in how Italian firms comply with IR guidelines (a part the work of Busco, Frigo, Rigattoni, Quatrone; 2013) and considering that the CSR sector in the Italian market is increasing both in quality and in number of report issued (Romolini, Fissi, Gori; 2012). As a consequence it was the time for a paper to explore the situation of the development of Integrated Report in

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one of the most important economies of the European Union. Since this paper is based on a comparative analysis of two firms, its conclusions might not be completely generalized to the entire Italian (and the worldwide) scenario, therefore there is a need for further research to have a more complete overview on how the implementation process is going.

This essay will also expand the literature related to comparative analysis, applying it for one of the first times to the study of IIRC.

1.5 Thesis structure

In order to convey clarity and rigor to this essay, it will be structured in the following way. First of all there is a literature review regarding the development of the Corporate Social Responsibility Codes. The path followed in this part brings the reader from the first official multi-comprehensive reporting experiments to the development of the IIRC Framework; its aim is to provide a good overview of how long and difficult was the process of getting to this revolutionary body of rules. After that, there is the Theoretical Background, which explains how the Integrated way of reporting is becoming a routine in the firms that decided to adopt it.

Then after a small historical background of the two analyzed companies, the findings are presented and described. A discussion of the results follows and in this part the theory improves the understanding of the findings. Finally there are the conclusions, which are answering directly the two research questions.

Chapter 2 LITERATURE REVIEW AND THEORY

This section will be divided in two parts; in the first one there will be an overview on the implementation of Corporate Social Responsibility codes in the course of the last sixty

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years, arriving until the creation of the IIRC. The CSR practices considered however cover only the ones that adopted a holistic approach2 and are not simply limited to a simple separated sustainability report. This overview has a double aim: to guide the reader through the evolution of sustainable reporting, in order to fully understand the demand for a report that comprises in it social, environmental and economic issues and also to make explicit the unique features that are making IR different from the previous forms of reporting.

In the second part the focus will be shifted towards the theories that underpin the diffusion of the IR, with the purpose to give a theoretical justification for the development and adoption3 of this integrated form of accountancy.

2.1 Literature Review

After the increase in public awareness for environmental and social issues experienced during the second half of the XX century, many firms felt the need to produce documents and reports that show a behavior that take into account this kind of ethical issues.

The non-financial reports produced were of many types, going from scorecards to experiment of full-cost accountability to separate CSR reports following different Frameworks. The main problem of the development of these practices was the total lack of a set of rules adopted by the great majority of the market players. As a matter of fact the Institute of Chartered Accountants in England and Wales issued an inquiry in which there was the summary and the results of eleven different types of reporting models; the conclusions were that ―none of these models, whatever their merits, has so far succeeded in commanding general support. At present, they provide a collection of interesting and challenging ideas, many of which seem to have little prospects of widespread implementation‖ (ICAEW, 2003). However, if the lack of a vast diffusion was a big source

2

For holistic approach it’s meant the tools that include an overview of both financial and non-financial figures

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of constrain for these standards, other problems that were jeopardizing their success are still without a solution.

A good example of an accounting practice in which there was the combination of financial and non-financial elements is full cost accounting. It was one of the first practices that allow putting economic and social/environmental figures in one single report but it had the huge defect that there were still major unsolved issues about how to estimate externalities and how to embed them in the financial report. Despite the issuance of a full-cost accounting application guide by Bebbington et al.4, the implementation in practice has always been a source of concerns for the adherents to this type of projects.

Many papers (Herbohn, 2005; Antheaume, 2004; Robertson and Grace, 2004) have been written about the practical implementation of this technique and almost all of them have come to the same conclusions. The main problems of this tool are the determination of the causal relations and the measurement of externalities. Aesthetic issues5 and the lack of a unique way to evaluation6 are the causes of the bigger difficulties for the implementation of this accounting practice.

Another technique that was created in order to promote the consideration of social and environmental issues was the balanced scorecard. This methodology was developed by the researchers Robert Kaplan and David Norton (1996, 1996, 1998, 2001) and it can be defined as a ―focused set of key financial and non-financial indicators‖, which main aim is to improve strategic alignment and ―enables individuals to make decisions daily based upon values and metrics that can be designed to support these long-term‖ objectives (Crawford, Scaletta, 2006). Companies will be assessed under three main criteria7 and according to four perspectives, which are Learning & Growth/People, Internal business processes,

4

According to whom the definition of full cost accounting is a practice that “allows current accounting and economic numbers to incorporate all potential/actual costs and benefit including environmental and perhaps social externalities”.

5

“You can’t value social value. You can’t do it with aesthetics. You cannot quantify because aesthetics is about smell. You know you go into a beautiful waterfall setting—you can smell it, you can hear it, you can see it, you can feel it. You know so all of those emotion feelings, but how can you put a number on it because one person will have a different feel to another” Herbohn, 2005

6_{“no comparison can be made of the external costs of two different companies due to differences in the}

methods used and the impacts taken into account. Very few impacts can, today, be translated into external costs and for those impacts that can be translated there are wide-ranging estimates.” Anthenaume, 2004

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Customers & Externals and Finances. The structure of this tool presents many similarities with the guidelines contained in the IIRC Framework. Obviously the difference between an Integrated Balance and a Scorecard is quite big at the outcome level, but in this case the ratio behind them is not so different. As a matter of fact both of them have their focus on the long-term and both have specific content elements8 which together give a complete overview of the firm‘s situation.

Many firms tried to put these ideals into practice but one time more a model that in theory was considered good structured and functional, in reality it showed some flaws. The papers of van den Woerd and van den Brink (2004), Monteiro, Castro, Prochnik (2003), Zingales et al.(2002) and Nørreklit (2000) showed that the most likely reason of these common problems is a lack of clarity in how the ideals expressed in the guidelines for the scorecards have to be implemented in practice. Because of this reason, it can be concluded that also the Balanced Scorecard has not reached its goal and its success was quite limited.

Many companies (especially small and medium enterprises; Koerber 2010) decided also to implement their own codes of auto-regulation regarding this type of issues (Compa et al. 2004) but also this kind of technique presented many issues. On one hand, it could be a good tool especially for small firms since the majority of the produced instruments are not designed for them, or they lack resources to implement the instruments and frameworks available (Tilley, 2000; Perrini, Tencati 2006) but on the other hand there is a lack of trust among firms, ―to behave in a responsible manner without the threat of external regulation to restrain their behavior‖ (ibid). This perception of not sufficient quality will be probably a huge brake in the development of the auto-regulation frameworks and for this reason there is evidence in the market that there is a clear call for an external code of conduct to govern the companies‘ environmental and social behavior (ibid).

The above reported techniques are just some examples of the fervid production of environmental/social accountability tools. However the huge proliferation of such instruments ―within nations, and across international collectivities such as the European Community, has given rise to differences of opinion over the rigor and the appropriateness

88

IIRC Framework has 8 content elements while the Balanced Scorecard has 4 perspectives. However it is agreeable to say that those Elements/perspectives fulfill the same function.

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of various standards, and to discussions relating to the harmonization of various schemes‖ (Grabosky 1994).

A way to overcome these problems is to use a set of regulation (made by some experts that work under the dependence of some firms of the same market sector or by external regulator bodies) shared by a large number of the market players, in order in this way to result more credible in the eyes of the stakeholders and also allowing greater comparability (Eccles and Krzus, 2010) by the adopters. The difference between this approach and the different techniques described previously is conceptually quite big: while in the examples above companies were deciding singularly to use a specific methodology for their environmental/social reporting purposes (in many cases without having their peers using the same methods to prove their sustainability-friendliness), in the following case there is the description of Frameworks designed externally and widespread among many competitors and other huge economic players. The reports produced under these standards therefore will be perceived to be of higher quality, since they follow standards designed by experts or by the representatives of regulatory institutions (in this way limiting the likelihood of having designed a framework that fit one or just few companies). This perception of higher quality will enforce credibility according to the dual relationships described by Fragale and Heath (2004), ―credible sources are seen as likely to produce credible messages and credible messages are seen as likely to have originated from credible sources‖. Azapagic and Perdan in their paper tried to rationalize and list the advantages of having standardized and they come out with the following pros: comparison of similar products made by different companies, comparison of different processes producing the same product, benchmarking of units within corporations, rating of a company against other companies in the sector or sub-sector and assessing the progress toward sustainable development of a sector or sub-sector

Going to the real practice and considering the specific-sector Framework, a good example are the Equator Principles, which are ―a credit risk management framework for determining, assessing and managing environmental and social risk in project finance transactions‖ (EP

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website; accessed 11/04/2014) issued by a group of ten commercial banks9. This framework, which can be enforced voluntarily by financial institution and has the purpose to regulate the environmental and social risk management of finance project activities (O‘Sullivan 2010), was the first framework for regulating such activities and was the object of attention and debates since its issuance. Nowadays, after a process of refinement (and institutionalization), there is the third version of the principles10.

However this set of rules is really topic- and sector-specific and it will obviously not be enough to answer to the market call for a unified way to account for social and environmental activities (Eccles and Krzus 2010). Thinking of a more general set of regulation applicable to both the financial and non-financial parts of the corporate reports, many sets will come up in the mind of who is acquainted with the CSR, since the list is quite long and comprehends Global Compact, the Organization for Economic Co-operation and Development‘s (OECD), ISO 14001, the Global Reporting Initiative (GRI), Sullivan‘s Global Principles, SA 8000, Series AA1000 and ISO 26000.

Considering the GRI, it is the most adopted, robust and comprehensive frameworks (Hussey, Kirpson, Meissen, 2001; Marimon, Ameida, del Pilar Rodriguez, Cortez, 2012) produced for sustainable reporting. The GRI was launched in June 1997 by the Tellus Institute and by the Coalition for Environmentally Responsible Economies (CERES)11 with the support of UNEP (United Nations Enviroment Programme) from 1999.

The main purpose of this initiative is to ―make sustainability reporting standard practice by providing guidance and support to organizations‖ (GRI website) and for fulfilling this idea, GRI issued until now four versions of the GRI Sustainability Reporting Guidelines. The GRI Sustainability Reporting Guidelines use the so called ―Triple-Bottom Line‖ approach (since they consider separately Economic, Social and Environmental aspects of the company) and moreover it considers also the three p‘s, people profit and planet.

9_{ABN Amro, Barclays, Citigroup, Credit Lyonnais, Credit Suisse, HVB, Rabobank, Royal Bank of Scotland,}

WestLB and Westpac

10

this process was in action because of the action of many NGO’s stakeholders and also because the “later adopters” of this Framework were not just passively try to be conforming with the minimum standard required but tried to comply in a proactive and effective way.

11

CERES, is a non-profit organization that issued also the so-called CERES Principles, a ten point environmental code for promoting sustainable conducts among the adherents.

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This completeness has been allowing the GRI to be the most common diffused framework of sustainability. According to the findings of Marimon et al., in 2010 it was adopted by 1656 company, among which half of them is European followed by Asian and Latin-American companies. The Spaniard researchers also found out a positive trend to toward a more widespread adoption of the Global Reporting Initiative‘s Guidelines, thanks to a standardization trend in Social Reporting in the capital market (this trend was also predicted by Willis in 2003). However there are two factors that can possibly make more difficult its diffusion and if one factor was partially eliminated by the fourth edition of the guidelines (it was the harmonization of GRI with local and other environmental/social regulations), the second one is still an issue. It is shown by the academic research that GRI practices are adopted mostly by big firms (Preuss, Barkemeyer, 2011) therefore showing a certain degree of small-firms unfriendliness. As a matter of fact it was demonstrated by Perrini and Tencati (2006) that GRI12 is not suitable for the SMEs because of ―their complexity, the limited flexibility and the need for formal procedures‖.

The Triple-Bottom Line approach ,even if is more and more followed by firms, still presents some inefficiencies because of the fact that it is seen by many firms only as ―compliance exercise that has to be dealt with as quickly and as cost-effectively as possible‖ (Painter-Morland, 2006). A way to go further this perception is to implement a more firm-engaging framework with no more separation between the company‘s elements categories (Environmental, Economic and Social) which is able to provide added value also to the firm itself and not only to its external stakeholders (Eccles, Krzus 2010). A new idea of reporting which come out in the 2000‘s years is the so called ―Integrated Reporting‖. This new way of reporting according to the definition of IIRC is ―a concise communication about how an organization‘s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term‖. It combines financial and narrative information found in a company‘s annual report with the nonfinancial (environmental, social and governance issue) and narrative information present in a company‘s CSR report (Eccles, Krzus 2010). The innovative feature of this document reside in the fact you have all the information in one single

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document and that financial and non-financial figures are presented in such a way that shows their impact on each other (Ibid). This methodology has systematically been studied and ―regulated‖ by IIRC only from 2009, but the first examples of Integrated Reporting dates back to the yearly years of the 2000s. In 2002 the Danish healthcare company Novo Nordisk issued for the first time a ―One Report‖ with both financial and non-financial issues in it. After a short time the example of Novo Nordisk was followed by Natura, United Technologies Corporation, Ricoh, Aracruz and many others proactive firms.

The path tracked by these innovative companies was for the first time put into law by one country in 2009; it happened in South Africa with the so-called King III, with a comply-or-explain basis. This regulation is compulsory for the company listed in the Johannesburg Stock Exchange, in order to maintain the level of sustainability of South African firms as one of the highest among the emerging countries (KING III report). The main aspects that King III are the willingness to promote are a good governance of the firm, the primary moral and economical imperative of Sustainability and also the creation of a Corporate Citizenship and it will do this by integrating the three dimensions of Environment, Society and Economy in one single report (Ibid). Until now, the KING III enforcement can be considered as a successful regulation since ―it has certainly succeeded in giving social, environmental and ethical information greater presence throughout the report as a whole and has in many cases resulted in the inclusion of important items of social, environmental and ethical impact in core sections such as the operating review, rather than being limited to a ‗sustainability review‘ and seems to have fastened the movement toward a creation of better environmental-governance practices‖. (ACCA 2012)

After the enforcement of King III and with the rising urgency towards Integrated Reporting (Eccles et al. 2010; Eccles, Krzus 2010; Krzus 2011) there was the discussion about the foundation of the IIRC at the Prince's Accounting for Sustainability Forum meeting on 17 December 2009; the time for the official formation of IIRC came on the 2nd of August 2010, when it was also estabilished the steering committee chaired by Sir Michael Peat, Mervyn King, Paul Druckman and Ian Ball. The rhythm of the following events was pressing: in 2011 were issued the Integrated Reporting Discussion Paper and was launched the IIRC Pilot Programme, in 2012 the IR Database was created and the prototype of the Framework

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was issued while in 2013 the Framework and the related Consultation Draft were published. As for the IIRC Pilot Programme, it is a project developed with the aim of underpinning the development of the IIRC Framework; until now13 around 100 firms of many different countries have adhered to this project.

Considering IIRC the groups represented in the Council include regulators and standard setters14, the Chairs of the Big 4 accounting firms and other global audit firm networks, leading international groups with broad sustainability mandates, international bodies15, international accounting and auditing bodies16, investor groups; representatives from leading corporate reporters; and leading academics in corporate reporting (Cheng et al. 2014). Obviously the lineage of the members of IIRC helped the organization in obtaining the international reputation for reaching the goal of its mission, managing to create momentum and consensus for the concept of IR (Adams, Simnett; 2011). ―Rhetoric (or framing) strategies are often adopted to enable professionals to use their access to various capitals to influence the social order, shape the speed and direction of field level change and legitimate the acceptance of particular change programs‖. (Humphrey et al. 2014) The Framework has to be divided in 6 content sections17 and it introduces the concept of the ―capitals‖. The capitals are ―stocks of value that are increased, decreased or transformed through the activities and outputs of the organization‖ (IIRC Framework); obviously organization do not have fixed amounts of them and the concept of value creation is the result of the ―sum of the values‖ of the different capitals (there could be the case in which even if there‘s an overall increase in value, the values of some capitals have decreased). The capitals considered are the Financial capital, the Manufactured capital (Buildings, equipment, infrastructures), the Intellectual capital (intellectual properties and organiza1tional capital), the Human capital, the Social & relationship capital and Natural capital; obviously not all the firms will give the same importance to all the typologies of

13

First of July 2014.

14_{International Organization of Securities Commissions (IOSCO), the International Accounting Standards}

Board (IASB), and the American Institute of Certified Public Accountants.

15

including the World Bank, the United Nations Global Compact and World Business Council for Sustainable Development (WBCSD).

16

including the International Federation of Accountants (IFAC) and the Institute of Internal Auditors (IIA)

17

Organizational overview and external environment, Governance, Business model, Risks and opportunities, Strategy and resource allocation, Performance, Outlook.

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capital (a chair-producing firm will emphasize the importance of different capitals if compared with an Assurance company) but what matters is the presence of all of them and their interaction among each other.

All the above-mentioned elements are treated in the IR following the guiding principles of IIRC18.

If the company is able to follow all the guidelines and respect the procedures and principles, it is capable to create value for stakeholders, considering that the firm will experience better decision making, better communication with stakeholders and it improves integrated thinking especially referring to the creation of value in the long run (Cheng et al. 2014). In order to fully implement IR a new way of thinking is required, the so called ―Integrated Thinking‖. According to the IIRC, this mindset will allow companies to have an integrated approach on all their activities, knowing perfectly the consequences of an action of one department on all the other departments. The importance of this step is confirmed by the emphasis the authors of the framework put on this matter (the expression ―Integrated Thinking‖ appears 16 times in the Framework) and by the essay of Humphrey et al. In this last paper it is stated that Integrated thinking will be encouraged and driven by IR, in opposition to the so called ―thinking in silos‖ promoted indirectly by the normal reporting. The forma mentis promoted by IIRC therefore will, according to the intentions expressed in the Framework, lead to an overall better resource allocation and value creation in the long term.

This beneficial relation is explained by Eccles and Krzus (2011). The adoption of the Framework will start a beneficial chain process in the firm, since it will allow the company to obtain greater clarity about relationships and commitments. This improvement will as a consequence lead to a better decision making process (Adams, Simnett; 2011) and a deeper engagement with all stakeholders.

Integrated Reporting presents also some issues. Some guidelines are really theoretical and they need a big effort in order to be understood and fulfilled19. These difficulties are

18

Strategic focus and future orientation, connectivity of information, stakeholder responsiveness, materiality and conciseness, reliability and completeness and consistency and comparability

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witnessed by the paper of Wild and van Staden in which it is reported that the majority of the IR cannot be classified as concise, the average of the principles addressed is only 2.7 (out of six) and in many cases there is a complete lack of the future outlook. Anyway it has to be said that the Framework is only at the beginning of its process of implementation and therefore it needs more time to be judged regarding the easiness of use. A suggestion on how to overcome these issues is to change the education programs in universities and other accountancy institution (Owen 2013). The goal of that is to provide the accountants of tomorrow a new integrated mindset that will help them for the understanding and the implementation of the IR Framework20. However until now no changes in education have been registered and it will take time to change accountancy world such in depth.

After this long review of the tools and practices that can be considered the ancestors of the Integrated Report, some conclusions can be drawn already. Until now all the techniques preceding the IR presented some major flaws, which prevented them a large diffusion. On the other hand for the Framework heavy defects has not been registered yet21. On the contrary it has overcome many of the limits found in the other CSR methods. The high lineage of IIRC and the universality of the guidelines are conveying to the Framework the flexibility and credibility indispensable for being considered as the reporting practice of the future22. As a matter of fact because of the above mentioned advantages IR is becoming more and more diffused among the big firms of the World.

Considering all these factors that are showing the rising relevance of such a way of reporting, this comparative analysis will investigate at a firm level how and why the two companies have adhered to the IIRC, and also if really the IR can be seen as the ultimate way of reporting23.

20_{“Modern accounting syllabuses will also need to contain more content on business risk, integrated into a}

range of syllabuses, rather than located in a single discrete syllabus. This content will include both financial and non-financial risk and will be mainly aimed at the and tactical rather than operational levels, although this may vary depending on the subject covered”, Owen 2013

21

Adams and Simnett (2011) however have found some possible barriers for the diffusion of the IR in the short run. These barriers are: the applicability of Framework in many different jurisdictions, the extensive disclosure of information that can be regarded as sensitive and the need for the development of new audit procedures

22

This element will also be confirmed in the interviews.

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2.2 Theoretical Background

The development and the diffusion of IIRC can be explained through the point of view of the Institutional Theory. In particular some traits of normative and mimetic isomorphism can be recognized in the ―integration process‖.

Institutional theory regards how the pressures and processes of the institutional environment influence organizational structures and practices. It has many branches among which the most used are the new institutional economics (NIE), the new institutional sociology (NIS) and the old institutional economics (OIE) (O‘Sullivan, 2010). The new institutional economics deals with the structures that govern economic transactions (Scapens 2006) while NIS deals with social and cultural pressures and processes that shape organizations. The branch that will be followed in this dissertation is theOIE, which refers to institutions that modify and shape actions of individuals within the firm (O‘Sullivan 2010). One of the key papers regarding this approach is the one of Di Maggio and Powell of 1983. The institutionalization process is operated through the concept of isomorphism; in this essay this concept is explained and there is the illustration of three different types of Isomorphism. Isomorphism can be defined as ―a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions‖ and according to the two American researchers there are three types of it: coercive isomorphism, mimetic isomorphism and normative isomorphism. Coercive isomorphism is led by changes in the regulation or in the market which oblige firms to comply with them, therefore every changes that occur in the firm structure or processes is basically caused by external constrains. The mimetic approach instead regards the voluntary adoption by firms of practices and structures which are used by companies that are generally considered by their peers and the public as successful. Concerning the normative isomorphism the homogenization mechanism is spread through professionalization. With the term professionalization it‘s meant the way in which similar ideas are diffused among the

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community of the various professionals. There are basically two channels through which trends are spread and these are Universities (and other education institutions) and specific network or associations of professionals.

It can be seen that Mimetic Isomorphism and Normative Isomorphism have both taken place during the diffusion of the Framework. On one hand the importance of the adherents of the PP (this element came out in the interviews to the two companies) has pushed other companies to take part in it; this kind of ―chain-reaction‖ can be categorized as a sort of Mimetic Isomorphism. On the other hand the fact that IIRC is a committee made up of professional associations and famous academics makes agreeable to say that also Normative Isomorphism can be identified in the process. The influence that this organization has on the Business-world is given by the lineage of its founders/associated, among which the most famous are the professors M. King and P. Druckman (whom standing reputation was able ―to call on significant social capital to escalate the momentum behind the IR idea‖; Humphrey et al. 2014). With the influence and fame of the members of the Board and of the Council, IIRC managed to set agreed guidelines that are now being adopted by the majority of the biggest companies of the World. The effects of the presence of such famous characters was studied in the paper of Humphrey et al. (2014), in which there‘s a deep observation of the reasons of the quick and wide spread of IIRC and its Framework. Humphrey et al. recognizes as one reason for this fast ―diffusion‖ the large network of institutions and famous academics involved in the project; as a matter of fact it is stated by those researchers that since its foundation IIRC ―continued to mobilize and build on its social capital, and persistently presented itself as a comprehensive coalition of representatives from civil society and the corporate, accounting, securities, regulatory, NGO and standard setting sectors‖. In order to follow this path aiming to increase the general consensus towards IR, IIRC has been making a huge use of the so called ―Memorandum Of Understanding‖ (MOU), signed together with other big and important players of the reporting arena24; the purpose of these Memoranda is to estabilish a formal sense of mutuality and reciprocity among IIRC and its partners (Ibid).

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In this way25, the institutionalization process is taking place. Since the ―process‖ is the key theme of this thesis, the Framework of Burns and Scapens (2000) is used. This paper is used because in the present literature regarding Institutionalization changes, the majority of the papers focus their attention mostly on the outcome (Covaleski et al. 1993) and not on how a determined outcome was reached. On the other hand Burns and Scapens have as a main purpose the explanation of the process in itself.

The process of change in management accounting can be defined in three different dichotomies. A first distinction has to be done between formal and informal changes. Informal change happens when ―mutations‖ occur at a tacit level and it can be defined as a silent movement toward change. Regarding the formal change it starts with the introduction of new rules and / or through the action of powerful groups. It is important to say that the ―successful implementation of a formal change may require new ways of thinking‖ (Burns and Scapens, 2000)26. The second dichotomy is between revolutionary and evolutionary changes. In this case revolutionary changes modify in a considerable way rules and routines while evolutionary modifications cause ―only ―minor disruptions to existing routines and institutions‖ (Ibid). Finally the last distinction is between regressive changes and progressive changes. A regressive change is a modification which somehow restricts institutional dominance. A progressive change on the other hand is a mutation which applies the best available knowledge and technology to problems and seeks to enhance relationships‖ (Ibid).

After this small review of the features of an institutional change, some elements have to be recognized in order to be able to apply the Institutional Realm. First of all there is the need to define and identify the institution. An institution according to the OIE is ―a way of thought or action of some prevalence and permanence, which is embedded in the habits of a group or the customs of people‖ (Hamilton, 1932). In the case of this dissertation the institution is the ―old way‖ of doing reports and IR through the Institutionalization Realm is

25

Thanks to normative and mimetic “pressures”

26_{The formal change, due to its features and the need of a new way of thinking seems to describe well what}

happened with IIRC. However conclusions and similarities between theory and reality will be only discussed in the section “Discussion” and “Conclusions”. Therefore the reader has to wait for those sections to see how much reality was adherent to the theory.

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going to change the current status quo. This shift will be carried out thanks to the interaction between rules and routines, which presences in the accounting practices is considered in this dissertation as a basic assumption. For a definition of them, no better words than the ones of Burns and Scapens can be used. “Rules are the formalized statement of procedures, whereas routines are the procedures actually in use. Rules are normally changed only at discrete intervals; but routines have the potential to be in a cumulative process of change as they continue to be reproduced‖. The adherence to the Pilot Programme and therefore to the Framework has introduced a new set of rules in the reporting scenario of the firms and that is why changes are expected in the ―institutional way‖ of doing reporting. In order to analyze these mutations and how they are taking place, the Institutional Realm is used and can be considered the core part of the underpinning theory in this dissertation.

Scapens and Burns have set 4 phases in which the process of institutionalization is subdivided. At first a set of principles is encoded (a) in a group of rules and this will lead to the reformation of ongoing routines. Then these rules have to be applied using conscious choices or thanks to reflexive monitoring (b). The third step (c) occurs after some time: it regards the so called routinization, since the behaviors after a period of time become mechanical among the people who are applying these rules. Finally the so called-institutionalization (d) occurs: the rules set at the beginning of the process are perfectly acquired and spread among the business community and the accounting practices therefore have changed definitively. An important feature of this last phase is that routines ―are disassociated from the particular historical circumstances, they exist only in the understandings and stocks of knowledge of the individuals and groups‖ (Scapens and Burns, 2000). The mindset resulting from this process is ―this is simply the way how things are and how they have to be done‖, therefore procedures become so automatized that there is not anymore questioning about them.

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Analyzing the implementation of the Framework, a subdivision has to be done between macro-level and firm level. In the case of the macro level it is possible to recognize until now at least the first two phases. As a matter of fact the principles were encoded in a unique framework that was made available for economic actors to be applied. Also the second phase can be recognized in reality, through the adhesion to the Pilot Programme. The hundred firms that are participating to this initiative are the first group of companies who are practically implementing the new framework for Integrated reporting. As for the third phase the time has still to pass before Integrated Reporting will be considered by the economic community as a routine practice; obviously as for phase 4 it will occur only after the ―completion‖ of phase 3. Regarding the firm level, the situation has to be analyzed case by case. However for Generali and Eni it is possible to say that this routinization has already taken place27.

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This process can however find some resistances during its implementation. In the paper of the two American researchers three types of resistances can occur during institutionalization. These resistances are the formal and overt resistance due to competing interests, the lack of capabilities for applying the new rules and the resistance caused by a mental allegiance to estabilished way of thinking and doing.

These types of ―difficulties‖ are still quite possible in the Integrated reporting-adoption scenario, and especially resistance of the second and third type can occur. Adopting the IIRC Framework approach, which is quite different from the old way of reporting, may require capabilities and that not all companies own; as for the third resistance IR requires the so called integrated thinking, since a more holistic and comprehensive view of the firm is needed to implemented the so called One Report. Also regarding this last point, it will take time to many companies to adopt this new modus operandi.

Chapter 3 RESEARCH METHODOLOGY AND METHOD

In the academic research field, in order to answer to the research question that has to be investigated, a first major choice has to be done at the really beginning of the research process: the choice between a qualitative and a quantitative approach to the topic. In the case of a quantitative research, the focus will be on testing a theory in an artificial setting using a numeric and static approach, using the point of view of the researcher. On the other

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hand, a qualitative research will use an interpretative approach which will draw conclusion through ―the understanding of the social world through an examination of the interpretation of that world by its participant‖ (Bryman 2008). For this analysis the use of the dialectic is dominant, considering the fact that there is the need to highlight and interpret the meaning of processes and data coming from a natural setting.

In order to answer the research questions the choice has fallen on the qualitative approach. For explaining the diffusion of the IR in Italy, its effects and its reasons using only numerical data would not have been a suitable approach. Referring to the first research question28, a discursive approach is needed to investigate what has pushed the two companies to adopt the IIRC Framework. These reasons cannot be identified just looking at the IRs therefore meetings with company‘s employees are needed. Considering the second research question29 it appears to be possible to answer it only analyzing documental evidences. However if there is the willingness to have a fully understanding why certain choices has been made or why there are some omissions30 also here it is impossible to rely only on documents. As a consequence interviews are also needed here. Summing up there are a lot of discursive elements that need to be investigated and analyzed in a logic and verbal way. Numbers give proofs and evidences while qualitative data are able to describe processes. In this dissertation a descriptive analysis is given and therefore the only way for being able to do that is using a qualitative methodology.

The data collected for qualitative researches are coming basically from three main sources, which according to O‘Sullivan (2010) are interviews, observation and documentary analysis. Interviews can be considered as the core source of information and among this category we can find three typologies: structured interviews, semi-structured interviews and unstructured interviews. The most adopted approach (which will also be used in this dissertation) is the semi—structured one, which implies a pre-established plan of questions requiring an open-ended answer. In this way it is possible to obtain scientific rigor (the

28

RQ1: Which are the driving factors that pushed companies to adopt the IIRC Framework and what are the expected advantages to the companies as a result of the partnership with IIRC

29

RQ2: To what extent have the reporting ideals implemented by Generali and Eni been put in to practice and how adherent is their report to the Framework

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questions are already prepared before the interview therefore there is no room for improvisation) without compromising a certain amount of flexibility, which is indispensable for having a clear understanding of the processes (entities) that are analyzed. Interviews in this paper will have the main aim to explore the reason why IIRC was adopted and the reasons behind the choices that lead to the final outcome in the Integrated Reports. Interviews alone however would not have been enough for a plenary analysis of this phenomenon; documentary observation of firm‘s Integrated Reports production played a fundamental role for the whole understanding of IR implementation. Observation was fundamental for the preparation of the set of questions to submit to companies and it was also crucial for drawing the final conclusion about which level of development IR has reached in Italy.

As concerning the Interviews, the process for obtaining them, took a couple of months. First of all, after having seeing which Italian companies are taking part at the Pilot Programme, eight companies were contacted. Among these 8, only six companies answered and among these six, in one case the company itself suggested to go to their competitors for the information about integrated reports. The contacts were conducted before through e-mails and subsequently through phone calls. At the end of this process two companies were chosen, because of both the high-reputation and the willingness to collaborate.

As said before, the companies through which the analysis of IR in Italy are Gruppo Generali and Eni. The encounters were organized as multiple meetings, in the sense that more people would have attended them, in order to optimize the collection of information and to avoid the repetition of the data that would have come out if the interviews would have been conducted with only one interviewee per time.

The meeting with Assicurazioni Generali was scheduled for Tuesday 16th April and took place in the city of Trieste, where the Group has its main headquarter. It began at 15.00 and it was over around 16.25, therefore it lasted for about 84 minutes. In the meeting there were present the two main figures responsible for the adoption and implementation of the IIRC Framework and a representative of the CSR Department, which all together worked in a

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team in order to issue the first Integrated Report of the Group31. There was also another meeting with the Head of the GIR; this meeting was not directly linked with the thesis but it was done as a part of a job interview. However it was possible also in this occasion to get some information especially about the future paths of development of the Generali Integrated Report.32

As concern the meeting with Eni, the location chosen was San Donato Milanese (Milano), which is one of the historical headquarters of the oil company (San Donato is also known as ―Metanopoli‖, because of the presence of the industrial installments of Eni, which was and still is by far the major player for the development and expansion of this suburb of Milano33). The scheduled day was the 13th of May at 11 AM. The meeting was attended by two members of the department of sustainability, which are working in the sub-area of reporting. One of them was present ―physically‖ in the office in San Donato while the second interviewee was connected through a conference-call34, which however did not absolutely impair the quality of the interview. The meeting ended around 12.35, lasting for approximately 94 minutes. Both meetings were recorded and transcribed for analysis purposes.

During these interviews, the behavior of the interviewees was positively surprising. Being my first qualitative research, I had some concerns regarding how willing would have been interviewees to answer to my question; after this interviews all these concerns wiped away. After an initial phase in which they seemed to be somehow ―rigid‖ (even though their answers has been always complete and well-articulated), as the time was passing they showed more and more confidence and they started also to interact with each other, giving even broader answers and conferring to the whole meeting a really ―pleasant‖ atmosphere. What Gioia et alia stated in their paper in 2013 turned out to be extremely right (―We have

31

The people who attended the meeting are Nicola Padovese (project manager of the Integrated Report), Annamaria Bradamante (Responsible for the preparation of the Integrated Report) and Michela Giovannini ( CSR Department, she was in the team for the preparation of the IR).

32

New paths such as the implementation of the Internal Integrated Reporting. This meeting was obviously not recorded.

33_{The importance of Eni for San Donato Milanese is witnessed by the fact that when I arrived at the metro}

Station of San Donato I asked to an old man for the headquarter of Eni. This old man answered:” Asking for the headquarter of Eni is a really general question. Here everything belongs to Eni.”

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been surprised in the past – to the point where we are no longer surprised – at how willing informants are to reveal what we might have considered to be proprietary information‖) if during meetings the interviewer shows a reasonable amount of common sense, diplomacy and discretion.

After having obtained all the data, the phase of treatment of data began. In order to begin in an effective way, a discrete amount of papers about qualitative research was read, in order to make smoother this first approach to a qualitative analysis. Ritchie and Lewis (2003), Gioia et al. (2013), Houghton et al. (2013), Braun and Clarke (2013) and Burnard (1991) were equally important in getting acquainted with the methodology and the rigor required by this type of approach. However the paper of reference for the methodology of this thesis was the essay of O‘Dwyer (2004) which for the carrying out of this dissertation was as important as it is important a Sherpa for an amateur mountain climber.

The ―path of interview data analysis‖35

suggested by O‘Dwyer (2004) was implemented in the dissertation. First of all, for obtaining a general overview, the interviews were listened once again, in order to have a ―general feel for the interview findings and (…) to formulate some preliminary key findings‖ (Ibid). Subsequently they were transcribed no more than 10 days after each meeting. Also the notes taken during the meetings were also re-read, since in those notes many concepts expressed broadly during the discussions were synthetized in an effective way. After that a ―detailed in-depth reading of each interview transcript was undertaken‖ (Ibid). In this phase many themes were identified and the path to follow during the description of the case findings was coming out. Further readings followed and slowly I started to acquire the ―big picture‖ of the interviews. As a consequence in order to have a catchier summary of the main topics coming from the interviews two figurative maps were drawn. This phase, which was quite long and with a not so consistent ―documental production‖36

, was concluded with the display of the results in a figurative map per each

35

Pg 394

36_{During the phase of reading of the interviews, there were no “evident” steps forward for the completion of}

the thesis. This total lack of written production (a part from the graphical map of the topics) was quite frustrating for a novice writer of qualitative research like I am, since I was asking myself “Where are the evidences of your daily work?”

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interview37. These maps were developed according to the procedure illustrated by Attride-Stirling in 2001. In her dissertation the British researcher distinguishes between three categories of themes: basic themes38, organizing themes39 and global themes40. This scale goes from the ―particular‖ statements to the most general topic in the text. The figurative maps were drawn according to this categorization and they turned out to be really helpful in the organization of the ―Case findings‖ section. As a matter of fact the ―thematic networks are presented graphically as web-like nets to remove any notion of hierarchy, giving fluidity to the themes and emphasizing the interconnectivity throughout the network. Importantly, however, the networks are only a tool in analysis, not the analysis itself‖ (Attride-Stirling 2001). The big ―gift‖ left by the completion of this part was a consciousness of the data collected and a general idea on how to develop the case findings. As a last remark on the methodology used, there is quite an extensive use of quotations in the Case Findings section. The reason for this choice was to convey a more vivid picture of the reality and it was also ―essential in order to allow the reader to hear the interviewees voices‖ (O‘Dwyer 2004).

Finally the comparative analysis was chosen. A paper which was notable for the choice of a comparative approach was the essay of Boeije (2002) in which it is explained step by step41 the ideal phases of a comparative study. Considering the nature of this research (interviews with more people instead of multiple singular interviews) only step 1 and step 3 are implemented in this essay. Especially step 3 can be considered as the core step of this dissertation. In fact in the phase of analysis of the transcripts the key points/observation that were done are equal to the questions that should be done in the opinion of the Dutch researcher. These questions (which are reported in the footnotes)42 regard the similarities

37_{The two maps are reported in the section Annexes (Annexes number 4 and 5).} 38

“ Which are the most basic or lowest order theme that is derived from the textual data”; Attride-Stirling 2001

39_{These are “middle-order themes” which organize the basic themes into clusters of similar issues (Ibid)}_. 40

Global themes which encompass the principal metaphors in the data as a whole (Ibid)

41

1. Comparison within a single interview, 2. Comparison between interviews within the same group, 3. Comparison of interviews from different groups, 4 Comparison in pairs at the level of the couple, 5. Comparing couples.

42

-What does group 1 say about certain themes and what does group 2 have to say about the same themes? − Which themes appear in one group but not in the other group and vice versa?

Integrated reporting in Italy : a focus on the implementation of the IIRC framework in the Italian companies : a comparative analysis

FACULTY OF ECONOMICS AND BUSINESS

MSc Accountancy and Control

Integrated Reporting in Italy

A focus on the implementation of the IIRC Framework in the

Italian companies:

A comparative analysis

Student name: Marco Plos

Student number 10622624

First Supervisor: Prof. Dr. Brendan O‘Dwyer

Second Supervisor:

Abstract

Acknowledgments

Table of Contents

Chapter 1

INTRODUCTION

Chapter 2

LITERATURE REVIEW AND THEORY

Chapter 3

RESEARCH METHODOLOGY AND METHOD