Determinants for the voluntary adoption of integrated reporting and its impact on CSR disclosure : a case study

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Amsterdam Business School

Determinants for the voluntary adoption of integrated reporting

and its impact on CSR disclosure: A case study

Name: Friso Bouma Student number: 10467769 Date: 8-7-2015

Word count: 16.868

Supervisor: drs. R.W.J. van Loon RA

MSc Accountancy & Control, specialization Control

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Statement of Originality

This document is written by student Friso Bouma 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.

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Abstract

Integrated reporting (IR) is an upcoming trend within the field of corporate social responsibility (CSR) disclosure. Increasingly more organizations are changing their CSR accounting practices towards IR. The aim of this interpretative research is two-sided. It aims to explain why organizations currently adopt the innovation of IR and also aims to explore the impact of this adoption on an organization’s CSR disclosure. This is done by deriving and analyzing primary data from semi-structured interviews, documentation and direct observations. This study therefore contributes to the limited amount of primary qualitative data on decision-making for IR. The interviews are conducted with the four key internal participants of both the decision-making and implementation process of IR within a large Dutch industry-based organization. This organization has recently voluntary chosen to adopt IR as its new form of CSR disclosure. The collected data is analyzed from an interpretative view by using the legitimacy theory, the stakeholder theory, the institutional theory and the structuration theory. Furthermore, the study analyzes the continuity of IR within the field of CSR disclosure by placing this innovation in one of the four innovation perspectives as presented by Abrahamson (1991). It uses the empirical findings to conclude that the centralized organization in this case has adopted IR to gain legitimacy towards its stakeholders, in order to achieve its business goals. This adoption has increased the quality of the organization’s CSR disclosure, although this increment is mainly caused by the underlying increment of this organization’s stakeholders’ interests in CSR topics.

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1 Introduction

Since the end of the 1980's, corporate social responsibility (CSR) has become an increasingly more important topic for organizations (Gray, Kouhy and Lavers, 1995, Hahn and Kuhnen, 2013, Montiel and Delgado-Ceballos, 2014). The latest trend on sustainability reporting is the move from traditional sustainability reporting (TSR) to integrated reporting (IR) (Jensen and Berg, 2012). Dragu and Tiron-Tudor (2013a) explains the evolving process of CSR reporting in three stages: it starts with international non-financial reporting initiatives, followed by a CSR reporting era, which is followed by the emergence of integrated reports. This final stage has emerged since 2010, following the publication of One Report: Integrated Reporting for a Sustainable Strategy by Eccles and Krzus (2010). In 2013, reporting on CSR was done by 71 percent of the N100 organizations and 93 percent of the largest 250 organizations (KPMG, 2013 p. 11). 59 percent of the N100 organizations’ CSR reports have been externally assured, and two third of these organizations chose to engage a major auditing firm (p. 11). CSR information is also becoming increasingly included in annual reports. A majority of the N100 organizations included CSR information in their 2012 report, compared to 9 percent in 2008 and 20 percent in 2011 (p. 11). Organizations are taking major steps towards IR, yet only 10 percent actually claimed to have integrated their reporting (p. 29). This indicates that there is a very large support on IR topics, yet organizations are still to take the step to adopt IR.

The support for the innovation of IR is explained by the increased demand by stakeholders for information to aid their decision-making, including additional non-financial information to complement financial information (Eccles and Krzus, 2010). The fact that IR has become an increasingly more important topic is adopted by several organizations within different institutions, which now see IR as a common topic. These groups include institutions (GRI, 2013, IIRC, 2013), audit firms (Deloitte, 2013, Ernst & Young, 2013, PWC, 2013,) and academics. There have been academic researches on frameworks (Abeysekera, 2013, Jianu 2012), education (Owen, 2013) and several quantitative researches on determinants for adopting IR, including Dragu and Tiron-Tudor (2013b), Frías-Aceituno, Rodríguez-Ariza and García-Sánchez (2013), Jensen and Berg (2012), Rensburg and Botha (2014) and García-Sanchez, Rodríguez-Ariza and Frías-Aceituno (2013).

Contrary to the claims of Eccles and Krzus (2010), Rensburg and Botha (2014) state that still very few stakeholders use IR as their main source of non-financial information, and that IR is mostly seen as additional information rather than key information. Financial reports are still seen as the main reports containing corporate information. This indicates that IR is still in a novel stage and requires more development to become widely acknowledged (Dragu and Tiron-Tudor, 2013a).

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The remaining of the thesis is structured as follows. In the following paragraph, the relevance and contribution of this thesis to prior research is explained and both the research question and the underlying sub-questions are presented. In the third paragraph, the thesis discusses the extant literature in the area of both CSR disclosure and IR. It furthermore elaborates on social grounded theories explaining diffusion of accounting techniques through human interaction. Paragraph four presents the methodological outline. The fifth paragraph presents a detailed description of the case setting. The thesis’ findings are presented in the sixth paragraph. Paragraph seven summarizes the thesis into the conclusions. The thesis then concludes by presenting an overview of all used references.

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2 Research questions and contribution

As stated in the introduction, several quantitative researches on determinants for adopting IR have been conducted over the recent years. Yet this research field still lacks qualitative data provided by in-depth researches on the question why organizations are currently changing their sustainability accounting method from TSR to IR. Change in accounting methods is usually seen as a tool to reach compliance with the organization's objectives, where change linearly leads from defining an objective to reaching an objective. In reality, however, change is caused by the actions of different actors that operate within an institution, that cause complex interplay between stability and change (Macintosh and Quattrone, 2010). In spite of the complex nature of change, quantitative data can only identify trends and lacks to provide an accurate explanation on the question why IR is being adopted by several organizations around the world at this certain time. Furthermore, prior conducted quantitative studies tend to focus on specific determinants. Therefore, several researchers request to conduct in-depth empirical case studies on the determinants for adoption of IR. To answer these calls, this interpretative case study uses the open minded epistemology of social constructivism to illustrate the full picture of the determinants for adoption of IR within this specific case.

This case study focuses on the decision-making process for IR within a large Dutch industry-based organization. In 2014, this organization voluntarily started the transformational process from TSR to IR, which implies the alternation of disclosing CSR information from narrative-based to numerical-based. This also means integrating CSR information into the current annual report, which is currently mostly focused on financial disclosure. Furthermore, it concerns the effects of the adoption of IR on the internal organization. Along with the adoption of IR, the ownership of disclosing CSR information is transferred from the corporate sustainability department to the corporate finance department. Also, the adoption of IR requires the disclosed CSR information to be verified by an external accountant.

This study contributes to prior literature by using primary interview data from the four involved internal agents, combined with data from primary documentation and direct observations. The evidence found is analyzed using several theories to present an extent explanation of organization’s motivation for adopting IR. Furthermore, the found evidence is used to explore the effects of the adoption of IR on the organization’s CSR disclosure quality and its internal organization regarding data collection mechanisms. The combined evidence is used to answer the following research question.

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Research question: Why does an organization voluntarily adopt integrated reporting and how does that adoption influence both the CSR disclosure quality and the organization’s internal organization?

This research explicitly answers the call of Jensen and Berg (2012) to provide more primary data on organizations' motives for voluntarily changing from TSR to IR. To be able to provide in-depth information on the decision-making process in this setting, the following sub-question is answered. Sub-question 1: What are the organization's motives for adopting IR and are they in line with the organization's motives for its initial CSR disclosure?

Answering this first sub-question requires the interpretation of both the legitimacy theory and the stakeholder theory within this case. These theories imply that organizations depend their survival on their stakeholders. The rejection of an organization by its major stakeholders is expected to endanger the continuity of the organization. Therefore, organizations use stakeholder interaction by means of CSR disclosure to show their alignment to their stakeholders. Since IR is becoming the newest accepted CSR disclosure method within the organization’s institutional field, the following hypotheses is formed.

Hypothesis 1: The organization has adopted both CSR disclosure and IR as a strategic tool to demonstrate its alignment to its stakeholders.

This research furthermore answers calls from Unerman, Bebbington and O'Dwyer (2007, p. 237), Aerts, Cormier and Magnan (2006) and Matten and Moon (2008) to analyze the influence of institutions and structures for adopting CSR disclosure by using the institutional theory and the structuration theory. These theories imply that accounting practices evolve and that new accounting trends can become common to organizations (Unerman, Bebbington and O'Dwyer, 2007, p. 151). Frías-Aceituno, Rodríguez-Ariza and García-Sánchez (2013) finds quantitative support for institutionalism to explain the recent upcoming of IR as being the newest CSR accounting innovation.

The institutional theory furthermore focuses on isomorphism. This is a process that leads to homogenization of organizations. This means that external factors guide organizations and that organizations respond to each other, which causes them to transform their practices towards the same widely accepted rules and routines (Unermann, Bebbington and O'Dwyer, 2007, p. 155). According to this vision, organizations do not use a rational decision-making process to decide whether to change their accounting practices. Their choice to adopt IR is rather determined by the institution in which they find themselves. Aligned to this vision, the structuration theory states that agents within organizations are unable to independently base their decisions on rational grounds.

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Their decisions are caused by external impulses from social systems, which influence agents and cause agents to reflect these ideas in their ratio for decision-making (Mactintosh and Quattrone, 2010, p. 217). To determine whether the decision-making in this case was either done following either internal or external influences, the theoretical framework of Abrahamson (1991) is used. This framework is commonly used to determine whether an accounting innovation is either effective or ineffective and explains either the diffusion or rejection of a new accounting technique. This determination is done by answering the second sub-question.

Sub-question 2: What internal and external factors have directly and indirectly influenced the decision-making process on adopting IR, and how did they influence this process? According to the theories of institutionalism and structuralism, the decision for the adoption of IR is expected to be mostly externally driven. External consultants and other professionals provide the organization’s deciding actors with positive reports on the trends of IR, by which the adoption of IR seems a rational choice in the eyes of the actor. Due to the expected external influences on this decision, the following hypotheses is formulated.

Hypothesis 2: The majority of influences on the decision-making process on adopting IR were externally originated, which characterizes the adoption of IR as an externally driven decision.

The adoption of IR causes the integration of disclosure on CSR information into the organization’s annual report. Since annual reports gain more attention than the separate sustainability reports, IR presents a wider platform for CSR disclosure. Abeysekera (2013) states that CSR disclosure in its current numerical form lacks precision. The combination of numerical data and narrative data should present precise information which is illustrated within the right context. Yet, as presented in the introduction, Rensburg and Botha (2014) show that financial information is still the main source for decision making by stakeholders. CSR information is therefore expected to obtain a low level of interest within the IR.

Montiel and Delgado-Ceballos (2014) state that the move to IR may be business driven, and therefore question the issue of the weighting of the dimensions planet, people and profit. KPMG (2013) also states that there are some concerns that sustainability information will lose its depth and balance between the dimensions when it conforms to a more formalized style of reporting with IR. The novelty of above studies indicates that the effects of the adoption of IR are yet to be explored to a deeper extend. Therefore, this research explores the effects of the IR adoption and outlines the benefits and risks of the adoption of IR on the quality of CSR disclosure by answering the following sub-question.

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Sub-question 3: What is the impact of the organization’s adoption of IR on the quality of its CSR disclosure?

Following prior literature, it is expected that the adoption of IR causes CSR disclosure to be more precise and have a bigger platform within organization’s total disclosure. Yet, it is also expected that integrating CSR information within the financially focused annual report will cause CSR information to form a less significant, formalized section within the total annual report. Following this decreased status, CSR disclosure could become less important to the reporting organization which would lead to lower quality of its CSR disclosure.

Hypothesis 3: The organization’s adoption of IR causes decreased quality of its CSR disclosure.

Finally, Montiel and Delgado-Ceballos (2014) request for more insight on how IR helps for sustainable information to become part of the core business, and through which mechanisms a standardized system of CSR performance accounting and reporting this can evolve. Aligned, Jianu (2012) expects challenges in creating these internal standardized systems independently and refers to financial performance accounting and reporting. Where financial performance accounting has evolved within long years of financial regulation, CSR performance accounting is only in its infant stage. With the adoption of IR, CSR data is challenged to meet the quality standards for financial information and Jianu suggest referencing the determinants of data quality for financial information to aid the quality of CSR data. To explore the effects of the adoption of IR on the internal mechanisms for CSR data collection, the fourth sub-question is answered.

Sub-question 4: What is the impact of the organization’s adoption of IR on its internal mechanisms for CSR data collection?

Since IR is a recent trend concerning CSR disclosure, few organizations have already fully adopted IR and integrated its CSR data collection mechanisms. Therefore, the hypothesis for sub-question four is mainly built upon the suggestion of Jianu (2012) to refer to the financial data collection processes. Furthermore, it is built upon the first observation within this case study that the corporate sustainability department has consulted the corporate finance department on the implementation process of IR.

Hypothesis 4: The organization’s adoption of IR requests more professionalized CSR data collection mechanisms, which are derived from the financial data collection processes. Following the model of Spicer (1992), this study contributes to the research field by presenting both explanatory and exploratory aspects. The empirical findings on sub-questions one and two

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aid to the prior research on the determinants for IR by illustrating the context of these determinants using commonly used theories regarding CSR. Furthermore, the empirical findings on sub-questions three and four explore the effects of the implementation of IR within an organization on its CSR disclosure quality and its CSR data collection mechanisms. Figure 1 presents the research structure, containing the four sub-questions, their empirical causal relationships and their relations to the used theories. It also illustrates the distinction between the explanatory aspects and the exploratory aspects.

Figure 1: Overview of the research structure.

This paragraph presented the research question and the four underlying sub-questions. For each sub-question, calls from prior researches have been used to explain the relevance and added value of this research to the current research field of IR. Furthermore, this paragraph has explained what theories are used to answer the sub-questions and formulated hypotheses based on these theories. The following paragraph presents these theories used to analyze the empirical findings and to answer the earlier presented sub-questions.

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3 Prior literature

3.1 Introduction

This third paragraph provides an overview of the prior literature towards CSR and IR. It starts by giving an insight in the current terminology of IR and TSR. This is followed by the theoretical framework used to determine the expected effectiveness of IR as an accounting innovation. Then, the most common theories used to explain topics on CSR and IR are presented. These include the legitimacy theory, the stakeholder theory and the institutional theory (Hahn and Kuhnen, 2013 and Montiel and Delgado-Ceballos, 2014). The seventh section introduces the structuration theory, which is commonly used to explain change in management accounting systems (Macintosh and Quattrone, 2010). The paragraph continues by presenting the two most important guidelines for sustainability reporting as seen by the organization. It is concluded by a recap, which clarifies the cohesion between the presented theories.

3.2 Integrated reporting and traditional sustainability reporting

The International Integrated Reporting Council (IIRC) states that IR combines both financial and non-financial information into a single document (IIRC, 2013). The goal of an IR is to provide information about how the organization creates value on the short, medium and long term. This document should contain information about the “organization’s strategy, governance, performance and prospects, in the context of its external environment” (p. 7) that benefits all stakeholders. The IIRC defines six influential forms of capital: financial, manufactured, intellectual, human, social and relationship and natural (p. 13). Organizations applying IR should explain how the inter linkages between the relevant risks, opportunities and performances on the different forms of capital lead to value creation or value destruction for the different stakeholders (pp. 13-14). To present a complete image of the organization’s goals and performances, financial information and CSR information should be disclosed as a collective, and not separately (Eccles and Krzus, 2010).

TSR is defined as the form of sustainability reporting before the adoption of IR. In this case, the organization currently provides an annual separate CSR report, containing narrative information on different elements of the organization's impact on the environment and the society. By adopting IR, the organization reduces the amount of narrative information and adds measurable numerical information on its non-financial performances. IR is based on numerical information, where the role of narrative information is reduced to only clarify the numerical information. This is done because numbers are designed to present more precise information than

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narratives (Abeysekera, 2013, p. 234). Within the combination of numerical data and narrative data, numbers present precise information which is provided context by the addition of narratives (pp. 234-236). IR is designed to combine financial and non-financial information, disclosing a more holistic picture of the organization’s performances and future targets (Jensen and Berg, 2012). The case’s centralized organization is not obliged to externally report non-financial information until 2017 and is not obliged to produce an annual IR (European Commission, 2014). Therefore, the adoption of IR is voluntary.

Jianu (2012) states that there are challenges when integrating social and environmental information into the financial report. The data quality is challenged to meet the standards of financial data, which quality has evolved within long years of financial regulation. To be able to achieve this quality norm, Jianu (2012) suggests that CSR information should be built upon the framework of financial information.

3.3 Perspective framework of Abrahamson

To critically analyze whether the decision of adopting IR is either an example of an efficient or inefficient innovation, the framework of Abrahamson (1991) is used. Abrahamson uses a combination the dimensions of “outside-influence” and “imitation-focus” (p. 591) in order to position innovations within one of the following four perspectives: 1. Efficient-choice perspective, 2. Forced-selection perspective, 3. Fad perspective and 4. Fashion perspective (Abrahamson, 1991). For each of these perspectives, the expected rate of effectiveness is explained.

The efficient-choice perspective assumes that organizations are fully capable of using their independency and ratio in order to adopt a technically efficient innovation. The organization is not affected by any outside influences and independently decides to adopt an innovation. This perspective indicates the adoption of a fully efficient innovation. The forced selection perspective states that organizations are forced to adopt innovation by powerful external stakeholders, for example governmental regulators or powerful unions. This can be done despite the organizations' resistance to the adoption. Following the ideas of a free choice economy, organizations in this perspective are forced to adopt an innovation despite their resistance, and thus the adoption of innovations within this perspective is likely to be inefficient. The fad perspective assumes that organizations are uncertain on the outcome of the adoptable innovation, yet they are not pressurized by other organizations to adopt this innovation. Due to the uncertainty on the outcome, organizations tend to mimic other organizations within their network in their adoption of the innovation. This uncertainty brings the possibility of adopting an inefficient innovation. Yet, since the innovation is not imposed by other organizations, it is assumed that the innovation is

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driven by corporate politics. Hence, Abrahamson suggests that innovations within the fad perspective could still be efficient. Aligned to the fad perspective, the fashion perspective assumes that organizations are uncertain on the outcome of the adoptable innovation. Contrary to the fad perspective, however, the decision to adopt the innovation is based on the promotion of external organizations such as external consultants or business mass media. Since the goals of those external organizations are purely based on their own goal to widely promote their own innovation, this perspective assumes that the adoption of this innovation is mainly driven by goals of external organizations outside the institute, rather than the organization’s own corporate politics. While possibly being ineffective, aligned with the fad perspective, innovations within the fashion perspective have a chance to benefit organizations. For instance, innovations that assist organizations in appearing ethical or innovative may enhance an organization’s reputation towards its stakeholders, which would aid the organization in achieving its business goals. (Abrahamson, 1991).

Using this theory to scale the effectiveness of the adoption of IR applies to the case setting, since IR is an upcoming innovation and its effectiveness is yet to be determined. IR has been highly promoted by external consultants over the recent years, yet the effectiveness of this innovative accounting technique is still uncertain to the adopting organizations.

3.4 Legitimacy theory

The legitimacy theory states that organizations require a license to operate from society to be able to survive (Deegan, 2002). Legitimacy is grounded in the work of Suchman, 1995, where earlier literature from DiMaggio & Powell and Meyer and Rowan is combined to form the following definition of legitimacy.

“Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574).

Suchman (1995) describes three aspects of legitimacy: 1. Generalized, 2. Perception or assumption and 3. Socially constructed. The first aspect indicates that legitimacy is long-term oriented, and “an organization may occasionally depart from societal norms yet retain legitimacy because the departures are dismissed as unique” (p. 574). The aspect perception or assumption states that legitimacy, “represents a reaction of observers to the organization as they see it” (p. 574), meaning that organizations are able to create perceived legitimacy when reporting is not corresponding with the organizations’ objective behavior. This phenomenon is described by the term legitimacy gap (Deegan, 2006). The term legitimacy gap can, however, also be explained by changing societal

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expectations, while the organization remains operating in the same way it always had (Unerman, Bebbington and O'Dwyer, 2007, p. 135). The third aspect, socially constructed, states that “legitimacy is dependent on a collective audience, yet independent of particular observers” (Suchman, 1995, p. 574). This means that individuals have no impact on the legitimacy of an organization. Only collective groups can produce an impact on the legitimization of an organization.

Organizations can increase their legitimacy in terms of repairing, maintaining or gaining legitimacy (Deegan and Blomquist, 2006). Where repairing legitimacy is explained as increasing legitimacy to reduce the deficit of on other organizations, maintaining legitimacy is explained as keeping up with the other organizations and gaining legitimacy is explained as advancing faster than similar organizations (Unerman, Bebbington and O'Dwyer, 2007). Motivations for increasing legitimacy (Suchman, 1995) are grounded in either risk management or growth strategy. Where risk management explains managing the risks of being rejected by other organizations, by adopting the accepted norms set by these other organizations. And where growth strategy implies producing new norms arisen from own growth strengths and convincing the key organizations within the institute to conform to these new norms (Humphreys, 2014).

3.5 Stakeholder theory

Closely related to legitimization is the stakeholder theory. According to the stakeholder theory, organizations identify a range of stakeholders which they consider in their sustainability policy (Deegan and Blomquist, 2006). A stakeholder is defined as an agent having a legitimate claim on the organization. The organization depends in its survival on stakeholders’ continuous participation in the organization. The primary stakeholders of an organization are categorized as shareholders and investors, issuers and banks, consumers and suppliers, employees and trade unions, NGOs, media and the general public. Leading from their legitimate claim, stakeholders take interest in the organization’s CSR policy and performance. Organizations use stakeholder interaction to inform their stakeholders on their performance on these topics (Unerman, Bebbington and O'Dwyer, 2007). CSR disclosure is therefore seen as a form of stakeholder interaction. Deegan and Blomquist furthermore explain stakeholder interaction by using the managerial branch of stakeholder theory. In this view, stakeholder interaction is explained as a strategic choice to provide information on topics relevant to the most powerful stakeholders (2006, p. 349).

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3.6 Institutional theory

While strategic legitimization and the managerial branch of stakeholder theory see CSR as a strategic reporting tool, the social grounded institutional theory suggests that institutions reduce organizations’ opportunities to shape the actions of their agents (Hoffman, 1999). This is done presenting a set of “rules, norms and beliefs that describe reality for the organization” (p. 351). Aerts, Cormier and Magnan (2006) suggests that organizations may tend to mimic other organizations when under pressure to conform to a trend.

Burns and Scapens (2000) introduce an institutional framework to describe management accounting change from the process of institutionalization. The process of institutionalization explains change as a widely accepted adoption of changed perception of rules and routines by the organizations within this institute. Figure 2 shows this process in a model of cause and effect.

Figure 2: The process of institutionalization. Source: Burns and Scapens (2000, p. 9).

The model is built on the institutional realm, the action realm and a widely accepted perception of rules and routines within the institute. The first step in the process (arrow a) refers to the

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“encoding” of generally accepted assumptions within the institution to the current existing state of rules and routines. The second step (arrow b) represents “enactment” of this set through social interaction between the agents within the institution. This enactment can cause agents to undertake action. The third step (arrow c) concerns the “reproduction” of the rules and routines over time. The element of time within the cycle of enactment and reproduction can cause changed reproduction of the set of rules and routines, which is added to the current existing state of the set. This can ultimately lead to the fourth step (arrow d), which is the process of “institutionalization” of the changed set of rules and routines. Here, the newly produced changed set is gradually taken for granted by the institution’s actors (Burns and Scapens, 2000).

DiMaggio and Powell (1983) introduce the term isomorphism, suggesting that organizations' motives to adopt innovations are to legitimize themselves within their cultural and institutional context. Also, they explain pressure from external institutions and consultants as motives to adopt innovations. The three mechanisms of isomorphism are: 1. Coercive isomorphism, 2. Mimetic isomorphism and 3. Normative isomorphism (p. 150). Coercive isomorphism is closely related to the institutional type of legitimization. It states that rules, norms or laws exercise external pressure on an organization to adopt new practices. Mimetic isomorphism argues that organizations tend to adopt practices that are seen as more legitimate or successful in their organizational field. Normative isomorphism argues that professionals influence organizations to adopt new practices. These professionals can be found in consulting firms, education and in personnel recruitment, where the ideas of universities and external personnel influence the decision-making process of an organization on the adoption of innovations.

3.7 Structuration theory

The structuration theory is grounded as a social theory in the works of Giddens (1984). In 1990, this theory was used by Macintosh and Scapens to explain the impact of social structures on change in management accounting systems. More specifically, (Mutch, 2006) and (Humphreys, 2014) use it to explain change in sustainability reporting practices resulting from agent’s social interaction with its structure. Since structuration theory is designed to explain the contextual social forces that structure and determine individual choices (Macintosh and Scapens, 1990), it is expected to provide an in-depth insight in how the interaction between an agent and its structure cause the adoption of IR.

The structuration theory states that agents are subjected to execute a constant flow of actions. Agents are expected to use “reflexive monitoring of actions” (Giddens, 1984) to reflect on the actions they perform. They reflect on the outcome of their action based on its perceived

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successfulness. By performing these actions, agents gradually form a structure around them which is constantly changing by reflection on the outcomes of their actions. The structuration theory states that the actions agents perform can only be performed within their perceived range, which is limited by their structure. Here, it is essential that the agent is aware of these restrictions, to be able to rationally reflect its action. Due to the overwhelming amount of continuous actions an agent is required to perform, actors are incapable of fully analyzing the outcomes of their actions. Instead, they routinely use “reflexive monitoring of actions” to make unconscious choices based on their perceived range of possibilities that form their common sense (Mutch, 2006).

This theory is used to explain the diffusion of IR as a choice within a restricted perceived range of possibilities. When the agent’s structure would conclude into IR being the only acceptable method of sustainability reporting, an agent is expected to reflexively decide to adopt IR. To illustrate these presumed restrictions in choices, the following two sections present the most important guidance for sustainability reporting as seen by the main actors within this case’s centralized organization.

3.8 Global Reporting Initiative reporting guidelines

The Global Reporting Initiative (GRI) is considered to form a leading guideline for creating sustainability reports and for analyzing firms’ sustainability reports (Montiel and Delgado-Ceballos, 2014). It sees IR as an emerging and evolving trend in CSR disclosure, however, it only sees IR as an addition to the current form of CSR disclosure (GRI, 2013). The case’s organization notifies the GRI guidelines as being the generally accepted norms, and therefore uses them as an instrument to verify the compliance of both their materialism analysis and the content of their CSR disclosure to the institute’s norms.

3.9 Dutch transparency benchmark

The annual comparison between the Dutch largest organizations’ CSR disclosure performance is presented in the Dutch transparency benchmark. This benchmark is initiated by the Dutch ministry of economic affairs and is annually performed by a leading auditing firm. Actors within the institute are expected to use this benchmark to compare other organizations’ performances (Graafland and Eijffinger, 2004). By presenting this comparison, the benchmark creates a forum for stakeholders facilitating dialog on CSR disclosure. The benchmark is seen as a way to increase the transparency and accountability of organizations. Organizations that achieve a high score on the benchmark are awarded reputation (Lee and Kohler, 2008).

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This benchmark is seen by the organization as the generally accepted ranking of the institute’s organizations’ CSR reporting quality. The organization uses this ranking to compare its score to the other organizations, to see in what aspect and how it can improve its CSR disclosure in order to improve its reputation within the institute.

3.10 Theoretical overview

This section presents a resume on the theoretical framework. It clarifies the relationships between the presented theories by illustrating the network of relationships between actors and organizations within an institute. These relationships cause actors to enact each other, which is seen as the main cause for diffusion of accounting innovations.

As presented by the institutional theory, the institutes in which organizations act are subject to a lot of changes, in a lot of different fields. These changes are continuously triggered by the institute’s actors’ actions. A change within an institute represents the widely accepted adoption of changed perception of rules and routines by the organizations within this institute (Burns and Scapens, 2000). These rules and routines are defined by a social contract (Deegan and Blomquist, 2006), containing generally accepted norms, values, beliefs and definitions (Suchman, 1995). This set is structured by the actions of all involved stakeholders, which includes suppliers, both B2B and B2C customers, end consumers, political organs, financiers, financial institutions, employees, NGO’s and professionals (Deegan and Blomquist, 2006). Examples of rules concerning sustainability reporting are the GRI reporting guidelines (Montiel and Delgado-Ceballos, 2014) and the Dutch transparency benchmark (Lee and Kohler, 2008). An example of routines is the general expectation of an organization disclosing an annual CSR report. IR is seen as the latest accounting innovation in the field of CSR disclosure (Jensen and Berg, 2012). To determine whether IR is either an effective or an ineffective innovation for organizations, IR is placed in one of the four perspectives presented by Abrahamson (1991). This is done by examining the centralized organization’s determinants for adopting IR.

The change of an organization’s actions within the institute can either be triggered by the specialized strengths of an organization, or adopted from the set of the generally accepted rules and routines the institution, the social contract (Humphreys, 2014). The main reason for an organization to change their actions is to increase its legitimacy within an institution. This can be done by either gaining, maintaining or repairing legitimacy (Deegan and Blomquist, 2006). Motivations for increasing legitimacy (Suchman, 1995) are grounded in either risk management or growth strategy. Considering growth strategy, it is essential that the key organizations adopt the newly presented set of rules and routines, since they set the standards for new rules and routines

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to diffuse within the institute, ultimately to be taken for granted by the other organizations within the institute. Therefore, actors actively identify the key organizations within their institutes (Deegan and Blomquist, 2006).

This paragraph has provided the key concepts underlying CSR disclosure and the diffusion of accounting innovations. These theories are used to interpret the collected empirical evidence within this case study. The legitimacy theory and the stakeholder theory explain interactions between organizations on an organizational level. The institutional theory and the structuration theory focus on the human interactions between actors within organizations to explain diffusion of accounting theories from a social perspective. This paragraph has presented the framework to explain the current diffusion of IR within the institute. The thesis continues by presenting the research method in the next paragraph.

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4 Research method

4.1 Introduction

This paragraph presents the research method. It starts by providing information on the origination of this case study. This is followed by the sample selection for the interviews and the methods used to prepare these interviews. The paragraph continues by explaining how the collected data is coded, validated and used to both illustrate the case setting and to provide insight on the research question. All documents and recordings used in this case study are stored and can be retrieved from the author.

4.2 Case origination

As stated in paragraph two, the research field requests in-depth case studies on the determinants for the adoption of IR. The organization I am employed to has decided to adopt IR in 2014 and is currently implementing IR as its new form of CSR disclosure. Being an employee of this organization presented me the opportunity to conduct a case study within this organization. Hence, my position has given me the opportunity to attend internal meetings and deploy in-depth interviews with the main actors on the transformational process towards implementing IR. Also, this position presented me the opportunity to use internal documentation to verify the findings from the interviews.

Preliminarily to this case study, two meetings were conducted with the organization’s manager corporate sustainability (hereafter MCS) to discuss current issues on corporate sustainability. MCS mentioned the current transformation process from TSR to IR, which was initiated in 2014 to ultimately publish the first IR in 2017. The goals for 2014 were to define the KPIs aligned to the organization’s CSR policy and the stakeholders’ interests, to measure the first four KPIs and to acquire external validation on these four KPIs. To achieve a better understanding of this process before conducting the interviews, several internal and external published documents have been conducted. These documents include the external CSR reports of 2009 to 2013, the internal CSR roadmap and the internal CSR reporting manual under construction. The internal CSR roadmap includes the CSR objectives, defined KPIs and defines the expected year of its external validation for each KPI. The internal CSR reporting manual is a comprehensive guidance document which outlines the standards, boundaries, methodology and data sources used to measure and report KPI performances on CSR topics. Hereafter, a key IR team meeting on KPIs and data quality was attended to achieve a better understanding of the current status of the IR-process and in order to meet its key actors.

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4.3 Interview selection

To obtain a throughout understanding of this transformational process towards the new form of CSR disclosure and the organization’s determinants for both CSR and IR, four semi-structured interviews of 35 to 70 minutes have been conducted with two actors from the corporate sustainability department and two actors from the corporate finance department. This is the full scope of the internal involved actors related to the four sub research questions. Both external consultants and external stakeholders were unavailable for interviews. The four interviews were conducted with manager corporate sustainability (MCS), director corporate sustainability and communication (DCS), employee corporate accounting and reporting (ECF) and director corporate accounting and reporting (DCF).

The first interview was conducted with MCS. MCS had been appointed by DCS to lead the transformational process to IR. The goal of this interview was to achieve a complete overview of the determinants for CSR, the determinants for IR and the process and consequences of involving finance within the CSR reporting process. The interview presented views on the determinants for CSR and IR, the process of stakeholder interaction, the materialism analysis, defining KPIs, improving CSR data quality, the role of external consultants and the Dutch transparency benchmark and future expectations on CSR reporting.

The second interview was conducted with ECF. ECF is involved in the transformational process towards IR by being the key user from finance involved within the IR implementation project. This interview was mainly focused on the adoption of IR from the perception of finance. It became clear that corporate finance has 50 to 60 years of experience with validating and reporting financial information, yet it has no understandings of non-financial information. The role of finance in the IR process is to use their experience in financial data reporting to aid the processes of non-financial reporting. By going through the process of financial data measuring, collection, storing, consolidating and reporting, including a continuous process of validating the data, the interviewee was encouraged to reflect these financial processes on the process of non-financial data. Afterwards she noted the role of DCF in the process and advised to conduct an interview with him.

The third interview was conducted with DCS. DCS had been responsible for the organization’s CSR policy and CSR reports since shortly after the 2008 merger. He initiated the transformational process towards IR. Therefore, this interview was mainly focused on the organization’s initial determinants for CSR reporting and the organization’s determinants to adopt IR. DCS elaborated on the CSR policy before and after the merger, on the organization’s strategy

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and the role of CSR within this strategy and the role of the organization’s stakeholders throughout this process.

The final interview was conducted with DCF. As director corporate accounting and reporting, DCF is responsible for the internal verification of all numerical data within the annual report, which is currently restricted to financial data. With the adoption of IR, the organization’s annual report also includes CSR data, which also needs to be verified by the corporate accounting and reporting department. In 2014, DCF had agreed to assist corporate sustainability in the non-financial reporting process since his department had already built the solid non-financial reporting process. In line with interviewee ECF, this interview also focused on the current processes of reporting financial information, projecting these processes on the newly to be disclosed non-financial numerical information.

The interviews were fully written-out and stored. Afterwards, their containing facts were validated using both the earlier acquired documentation and the newly obtained external CSR report 2014, the transparency benchmarks of 2012, 2013 and 2014, and several internal documents including the outcomes of a major employee survey deployed in 2014. A minor quantitative analysis on the CSR reports from 2009 to 2014 was conducted to provide insights in the trends of these reports. This validation process was conducted to ensure the credibility and quality of the results (Yin, 1994 pp. 85-106).

4.4 Initial interview coding set-up

Prior to conducting the interviews, the coding for the interviews was based on the four themes following from the sub-questions: 1. Internal motives for CSR and IR, 2. Internal and external influences on the decision making, 3. Data quality and 4. Roles for data collection. After conducting the interviews, these four themes were formed into four of the five main themes shown in table 1. These themes covered the most mentioned topics in the interviews. Combined with the overall theme of theories, these formed the five main themes for coding. The five main themes were then split into more specific codes (table 1), which were used to code the written-out interviews by hand.

After coding the interviews, the coded quotes from the interviews were grouped together to form an overview of findings per code. This, however, resulted in a cluttered 35-page document which seemed to give little overview of the results per theme and seemed to lack internal consistency. This document therefore requested for a recap in order to provide structure.

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Table 1: Overview of the initial codes used to code the written-out interviews.

4.5 Understanding the interview outcomes

When constructing the recap of the coded interviews, it became clear that for the coded findings to become more structured, the findings in terms of quotes needed to be mapped into separate time periods. The themes were originally created from the idea that the decision for adoption of IR was an isolated action. Yet, the interview evidence clarified that the decision to adopt IR could not be placed into one isolated decision-making moment. The timeline which is presented in paragraph five shows that the actors continuously make decisions that they assume to aid the organization’s CSR disclosure. Furthermore, this timeline shows that these decision-making processes are subject to continuous influences from other agents within the institute.

The initial coding had mapped the key documentation under the sub research questions and theories. This coding formed large groups of quotes that show parallels with the sub research questions and theories. Yet, the large amount of collected data mapped within these themes made it impossible to formulate clear findings on the sub research questions since the combined quotes from the different interviews lacked clear context. It was not possible to form structured findings purely based on these mapped quotes without explaining their context. By perusing the earlier constructed overview of the coded quotes, other topics showing clear chronological interaction between events trough the element of cause and effect started to emerge. These affiliated key processes and events had been placed in several themes, yet they did not show internal consistency before since the original mapping had scattered them to separate themes.

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4.6 Constructing the case setting

The first main elements that emerged were “adjusting form”, “data quality” and “data collection”. Here, adjusting form indicates the process of adjusting the form of the report towards a more numerical based report. Data quality indicates the urgency for the CSR data quality to improve to match the required reliability of this disclosed data. To improve the CSR data quality, the mechanisms of data collection within the internal organization needed to improve.

These first three elements all focused on internal change processes, which were enacted as a result from many different influences from many directions within a widespread time period. To provide structure to these enacting factors, it was essential to add context by specifying what party enacted which change process, in what way and in what specific time period. For instance, external consultants played a major part in enacting the process of improving data quality in 2012, the process of stakeholder interaction in 2012 and 2014 and the process of changing the CSR report towards a more numerical based report starting in 2014.

These four new formed topics form the fundament of the case setting presented in paragraph five. The first topic is changing institute. The institute where the organization finds itself in is changing, where the priority for sustainability increases. The second topic is concerned with changing internal priorities. The organization notices the gap between itself and the institute. The organization’s priorities change to increase legitimacy within the changing institute. The organization’s sustainability priorities increase in line with the institute’s values of sustainability’s role within the organizations’ strategy. The third topic is formed around the alteration of the reporting form. The form of the sustainability report is changes to align to the new status of CSR as a major topic within the organization’s business strategy. The fourth theme focuses on data quality. The reliability of the CSR report’s containing data was criticized by both external parties and internal parties. The reliability of the underlying CSR data needed to improve. It needed to achieve the quality standards similar to financial data to achieve an acceptable rate of reliability. The fifth theme concerns CSR data collection. To meet the required data quality standards similar to the quality standards of financial data, the workflow of collecting, storing, checking, reporting and external verification of the data needed professionalization. Rooting these improvements within the standardized mechanisms of data collection into the internal organization is expected to be essential in order to be able to produce proper reliable non-financial data for the CSR report.

4.7 Providing insight on the research question

Clarifying the context by constructing the chronological timeline made it possible to structure the coded quotes from the original themes into clear findings concerning the four sub-questions. The

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original 35-page document mentioned in section 4.4 was printed. The included quotes were rated on relevance to the four sub-questions and then highlighted using four colored highlighters corresponding to the four sub-questions. The use of these highlighters shows the spread of internal consistency rate within the original themes. It presented a distribution of one to four colors per theme. Also, a lot of quotes did not directly provide insight on one of the sub-questions and was therefore excluded. In order to avoid passing over relevant quotes, the written-out interviews were again checked on relevant quotes which were not included in the original coding document.

To provide a clear structure within the sub-question outcomes, the sub-questions were split into thirteen dimensions (table 2). These dimensions cover the full range of quotes mapped into the sub-questions. The manually highlighted quotes were mapped into the different dimensions and entered into Excel program KODANI. This provided an overview of 67 key quotes concerning the sub-questions, mapped into the range of dimensions. Table 2 provides a full overview of the sub-questions, dimensions and amount of mapped key quotes. The build-in filters of KODANI were used to group all relevant key quotes within each of the thirteen dimensions. These groups of key quotes provided an overview of the different insights on the different dimensions, forming the findings’ backbone. In order to provide consistency, the dimensions in table 2 are intentionally ordered consistent to their inclusion within the findings.

Table 2: Overview of sub-questions, dimensions and amount of allocated key quotes.

The amount of selected quotes per interview as shown in table 2 correspond with the focus of the interviews. Interviewees MCS and DCS mainly focused on the first two sub-questions which concern the determinants for CSR and IR. Interviewees ECF and DCF mainly focused on the last two sub-questions concerning data quality and data collection mechanisms, since they were not involved within the decision-making process and rather focus on practical issues concerning the

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implementation of IR. The lack of key quotes from the financial interviewees on sub-question one and two illustrate the minor involvement of finance within the decision-making process. This, however, does not imply that these interviewees did not take the topics concerning these sub-questions into account. The quotes resulting from these interviews were simply not clearly outspoken or conflicting with the other findings to be regarded as key quotes.

The previous paragraph has presented the research method. It provided the case origination, followed by an overview of the evidence sources including documentation, direct observations and interviews. This paragraph also explained the process of coding and shuffling the collected evidence in order to provide structure to illustrate both the case setting and the findings. The following paragraph presents this case’s centralized organization by profiling this organization and presenting events correlated to the organization’s adoption of IR.

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5 Case setting

5.1 Introduction

To increase insight on the organization’s decision-making process for adopting IR, this paragraph presents the case setting. It starts by profiling the case’s centralized organization. Then, it presents a chronological timeline, containing the relevant events regarding the organization’s CSR disclosure. These events illustrate the continuous improvement process which has started with disclosing the first CSR report in 2009 and leads to the adoption of IR in 2014. The paragraph concludes by presenting future implications regarding the organization’s CSR disclosure.

5.2 Organizational profile

The centralized organization in this case is a large Dutch dairy industry-based organization. The organization has offices in 28 countries and employs over 22,000 people, to create an annual revenue of 11.3 billion euros. The organization is corporately owned by over 19.000 Dutch, Belgian and German member dairy farmers, and hence it has the legal form of a corporation. This form is exceptional for an organization of its size. Since the organization is a corporation, the organization is not listed. The organization’s shareholders are member dairy farmers. The main income source of the member dairy farmers is generated from selling their produced milk, where listed organizations’ shareholders are mainly interested in the increment of shareholder value. Therefore, the organization’s business model is grounded in being able to process and sell as much dairy as possible, at the highest possible price rather than creating the highest possible shareholder value.

The organization has arisen from several mergers throughout the past 150 years. The first organizations, eventually merging to the current organization, were founded by dairy farmers who corporately built dairy powder factories to process their dairy products. After a process of 150 years of acquisitions and mergers, ultimately three-quarter of the Dutch dairy farmers were members of the two biggest remaining corporations. These two corporations merged at the end of 2008, causing the newly formed organization to become one of the largest organizations in the Netherlands and one of the world’s five largest dairy organizations. This merger caused a sudden significant increase of the organization’s corporate size and therefore its media attention. The organization found itself being a major actor within its markets. This sudden growth increased its exposure towards other stakeholders within the institutional field such as the media, NGO’s, other organizations and the general public. The following section starts the timeline by illustrating how the 2008 merger resulted in the organization’s initial adoption of CSR disclosure.

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5.3 2009 – 2010: Legitimacy gap

In 2009, subsequent to the organization’s merger, the top 70 actors of the organization were brought together by the executive board. Their mission was to construct the organization’s new growth strategy towards the year 2020. During these sessions, the top 70 noticed a legitimacy gap between the organization and its institutional field regarding sustainability. Compared to the evolved standards of the institution, the organization’s strategy lacked a proper set of integrated social and environmental issues. The organization’s CSR policy before the merger was negligible. Both organizations performed only small, uncoordinated CSR activities. Only one of the two organizations published a CSR report before the merger. Comparable organizations had developed their CSR reports since the emerging of CSR disclosure in the 1980’s. To repair its legitimacy, the organization’s top 70 decided that CSR was required to be an integrated part of the organization’s business model. To suit this new role of sustainability, new CSR policies were formulated, focusing on four priority areas. The newly formed CSR board backed up these priorities by presenting a clear foundation containing clear norms regarding stakeholder involvement, guiding standards, continuous improvement programs and annual reporting. The merged organization’s first CSR report was published in July 2010.

The origination of the arisen legitimacy gap is explained by the organization’s legal form. Since the merged organizations were both not publicly listed, they were less publicly exposed compared to other organizations. According to Hahn (2013), prior research showed a positive correlation between organizations’ listing on the stock market and adoption of CSR disclosure practices (p. 12). Also, Hahn states that corporate size is widely acknowledged to positively influence the adoption and extent of sustainability reporting (2013). Corporate size is measured by total assets, turnover, sales, number of employees, or market capitalization. Furthermore, Hahn (2013) states that the positive causal effect of media exposure on both adoption and extent of sustainability reporting is widely acknowledged. The 2008 merger caused a sudden significant increase of the organization’s corporate size and media attention. The merger has increased its exposure towards media and other organizations within the institute.

5.4 2011 – 2012: Spreading the enhanced position of CSR

To suit this new enhanced position of CSR within the organization’s business model, the newly formed image of CSR needed to be spread throughout the entire organization. To lead this change, in 2010 the CEO appointed an experienced professional in the position of director corporate sustainability. This new director used his 20 years of experience within the field of sustainability to diffuse the new role of CSR within the organization. The process of diffusing the increased

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importance of sustainability within the organization especially took place between 2011 and 2012, but still requires constant attention to maintain its status. When looking at the current organization, a major employee survey performed in 2014 showed that this effort resulted in a substantial progress in terms of the engagement of employees regarding sustainability. The survey results indicate that sustainability is currently the second most engaged topic among employees.

5.5 2012 – 2014: Aligning CSR disclosure to the enhanced position of CSR

In 2012, the enhanced position of CSR had been introduced to and spread within the complete organization. Yet the form of the CSR report was not aligned to this enhanced strategic position of CSR. CSR had gained a major position within the organization’s growth strategy, but the organization’s performances on CSR topics remained unclear when using the current, majorly narrative, form of CSR disclosure. The form of the report required change for the organization’s CSR performances to become clearer. Stakeholders required the organization to show its responsibility for its CSR involvement instead of telling uplifting stories on these CSR topics. Also, they required the organization to publish its performances on the same key CSR topics each year in order to present trends on these topics. Instead of only telling stories on improvements that year, they also requested the organization to take responsibility for topics in which they performed poorly.

Inspired by both the transparency benchmark’s leading CSR reports published by other organizations within the institute and professional experts through journals and consultancy, corporate sustainability formed a concept of the new, to be created form of its CSR report in the form of an IR. It needed to grow towards a more figures-based report to be able to accurately measure the performances on the organization’s CSR goals. More accurate measuring would benefit both the organization’s insight in its performances on its sustainability goals and its reputation following the enhanced ranking on the transparency benchmark. In the process of forming these measurable KPIs, the organization was supported by consulting firm PwC. The process of formulating KPIs starts with annual stakeholder interactions to construct a materialism analysis. The organization narrowly follows the guidelines set by the GRI to construct this analysis. Every topic with high interest to both stakeholders and the organization is transformed to one or more measurable KPIs, which performances form the core of CSR disclosure within the IR.

An overview of the organization’s published CSR reports regarding 2009 to 2014 presenting the number of words, the number of words in key topics and the number of key topics is presented in Appendix A. This table and its corresponding graphs show clear increment of words within key topics between the reports published on 2009 to 2011. This amount then stagnates until the report

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published on 2014. Contrary, the number of key figures has risen since 2009. These findings confirm that the organization’s mindset regarding CSR disclosure changed in 2012. They indicate the organization’s intention to decrease the disclosed narrative data in return for numerical data.

5.6 2012 – 2014: Improving the reliability of CSR data

In order to publish a more numerical-based report, the underlying CRS data quality needed to be reliably measured. Several internal and external indicators clarified the lack of reliability of the organization’s CSR data in 2012. An informal audit executed by consulting firm PwC on non-financial data collection and validation revealed major flaws, also the organization dropped fifteen places in the transparency benchmark in 2012.

Following this analysis, the CSR board decided to initiate a continuous data quality improvement process. Corporate sustainability used the expertise of PwC to create clear reporting guidelines. These guiding documents includes clear definitions for each of the KPIs that are representative for the CSR policy. Also, they include the collectible data to measure the performance on these KPIs and the responsible departments or managers for the specific data collection.

5.7 2013 – 2017: CSR data verification

In the year 2013, the organization internally sees major gains in data reliability and data quality, yet the transparency benchmark of 2013 indicates that the organization’s report was still falling behind in terms of reliable measurement. This can mainly be explained because the benchmark measures reliability by the inclusion of a verification statement by an external, professional third party. The perceived rational next step in improving the quality of its non-financial data was to apply for external validation on the measured non-financial KPI performances. However, a pre-audit executed by PwC still showed material weaknesses in the organization’s CSR data collection mechanisms. In order to disclose reliably collected CSR performance outcomes, the underlying data underlying required to be collected and stored and properly in order to be back traced from the organization’s consolidated performances through internal verification processes. These processes of CSR data collection, storing, internal verification and external verification increasingly showed parallels with the verification processes used for financial data. Therefore, corporate sustainability decided to gradually involve corporate finance in this process.

5.8 2014 – 2017: Integrating CSR data collection mechanisms

While gradually getting involved during the second half of 2014, corporate finance confirmed that the CSR data quality was still not reliable enough for external validation conform financial

Determinants for the voluntary adoption of integrated reporting and its impact on CSR disclosure : a case study