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Theoretical Insights on Integrated Reporting: The Inclusion of Non-Financial Capitals
in Corporate Disclosures
By Mark Anthony Camilleri
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This is a pre-publication version.
How to Cite: Camilleri, M.A. (2018). “Theoretical Insights on Integrated Reporting: The Inclusion of
Non-Financial Capitals in Corporate Disclosures. Corporate Communications: An International Journal.
DOI 10.1108/CCIJ-01-2018-0016
Purpose
Corporations and large entities are increasingly disclosing material information on their financial and
non-financial capitals in integrated reports (IR). The rationale behind their IR is to improve their
legitimacy with institutions and stakeholders, as they are expected to communicate on all aspects of
their value-creating activities, business models and strategic priorities. In this light, this contribution
traces the theoretical underpinnings that have led to the organizations’ environmental, social and
governance (ESG) disclosures, and to explain the purpose of integrated thinking and reporting.
Design / Methodology
Following a review of relevant theories in business and society literature, this contribution examines
the latest developments in corporate communication. This research explores the GRI’s latest
Sustainability Reporting Standards as it sheds light on IIRC’s <IR> framework. Afterwards, it
investigates the costs and benefits of using IR as a vehicle for the corporate disclosures on financial and
non-financial performance.
Findings:
This contribution sheds light on the latest developments that have led to the emergence of the
organizations’ integrated thinking and reporting as they include financial and non-financial capitals in
their annual disclosures. The findings suggest that the investors and the other financial stakeholders
remain the key stakeholders of many organizations; it explains that they still represent the primary
recipients of the corporate reports. However, the integrated disclosures are also helping practitioners
to improve their organizational stewardship and to reinforce their legitimacy with institutions and other
stakeholders in society, as they embed ESG information in their IR.
Research Limitations / Implications:
This paper has discussed about the inherent limitations of the accounting, reporting and auditing
of the organizations’ integrated disclosures. It pointed out that the practitioners may risk focusing
their attention on the form of their reports, rather than on the content of their integrated reports.
Moreover, this contribution implies that the report preparers (and their stakeholders) would benefit if
their IR is scrutinized and assured by independent, externally-recognized audit firms.
Originality / Value:
This contribution has addressed a gap in academic literature along two lines of investigation. Firstly, it
linked key theoretical underpinnings on the agency, stewardship, institutional and legitimacy theories,
with the latest developments in corporate communication. Secondly, it critically evaluated the
regulatory instruments, including; GRI’s Sustainability Reporting Standards and the <IR>’s framework,
among others; as these institutions are supporting organizations in their integrated thinking and
reporting.
Keywords: Integrated Reporting, Non-Financial Reporting, Corporate Reporting, Legitimacy Theory,
Institutional Theory, Stewardship Theory.
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Department of Corporate Communication, Faculty of Media and Knowledge Sciences,
University of Malta, Msida, MSD2080, MALTA.
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Introduction
Several public-interest entities, including listed businesses are already disclosing non-financial
information in their corporate reports (Ioannou and Serafeim, 2016; Adams, 2015; Lueg, Lueg,
Andersen and Dancianu 2016). They may be driven by an increased awareness of corporate
social responsibility (CSR) issues (Elving, Golob, Podnar, Ellerup-Nielsen and Thomson,
2015). Alternatively, they could be influenced by institutions and stakeholder expectations
about the role of business in society (Golob, Podnar, Elving, Ellerup Nielsen, Thomsen and
Schultz, 2013; Brammer, Jackson and Matten, 2012). The report preparers are often combining
financial as well as material information on their environmental, social and governance (ESG)
performance in their integrated reporting (IR). Their corporate communications are stimulating
‘integrated thinking’ (Knauer and Serafeim, 2014) as report preparers gather information on
their organizations’ governance, performance and prospects from strategic and operational
departments (Flower, 2015; de Villiers, Rinaldi and Unerman, 2014). Therefore, they may
employ other institutions’ regulatory tools and instruments, including standards or frameworks
to support them in their internal planning and control purposes (Lueg et al., 2016). The
internationally recognized standards, approaches and principles gave led to significant
improvements in the organizations’ dialogue with a growing variety of stakeholders (Lai,
Melloni and Stacchezzini, 2018; Camilleri, 2015, Eccles and Krzus, 2010), and are helping
them to increase their accountability for the broad bases of financial and non-financial
capitals (Lueg et al., 2016; IIRC, 2013).
There is a wide plethora of possible disclosure formats that may be used for the corporations’
ESG disclosures, including the UN Global Compact, OECD guidelines for multinational
enterprises, ISO 26000, Global Reporting Initiative (GRI), and the International Integrated
Reporting Council (IIRC), among others. These regulatory instruments are intended to address
the shortcomings in corporate communications (Dumay, Bernardi, Guthrie and Demartini,
2016; IIRC, 2013), as former stand-alone, financial or social responsibility reports have failed
to account for the interconnections between financial and ESG performance (Eccles and Krzus,
2010). Notwithstanding, international and local institutional frameworks can(not) facilitate the
organizations’ sustainability reporting (Stacchezzini, Melloni and Lai, 2016; Golob, et al.,
2013; Jensen and Berg, 2011). As a result, entities may decide to incorporate robust economic,
environmental and social performance metrics in support of their overall vision for integrated
thinking, as IR provides a holistic picture of their businesses’ vallue-creating activities
(Maroun, 2018; Simnett and Huggins, 2015; Adams, 2015, Milne and Gray, 2013). The report
preparers communicate about their financial as well as on their non-financial performance that
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is consistent with their corporate strategy. IR presumes that the businesses are willing to
engage with different stakeholders, not just financial capital providers (Adams, 2015).
Hence, it brings about the socialization of financial and ESG performance, as businesses
respond to their stakeholders’ legitimate needs and interests (Lai et al., 2018; Higgins,
Stubbs and Love, 2014, p. 1102; IIRC, 2013).
Research Question
This contribution addresses a research gap in academia along two lines of investigation. Firstly,
it links key theoretical underpinnings from business ethics literature with the ongoing
developments in corporate communication. The stewardship, institutional and legitimacy
theories have contributed to the advancement of the organizations’ responsible and sustainable
behaviors that are often reflected in their integrated reporting (de Villiers et al., 2014; Ioannou
and Serafeim, 2012; Brammer et al., 2012; Muth and Donaldson, 1998; Davis, Schoorman and
Donaldson, 1997; Eisenhardt, 1989). Indeed, the legitimacy theory (Beck, Dumay and Frost,
2015; Deegan, 2002; Suchman, 1995) has often been used to interpret the content of corporate
reporting, including CSR communications (Elving et al., 2015; Golob et al., 2013). Thus, this
research adds value to the extant literature by exploring the emergence of non-financial
reporting within a broader legitimation strategy. It suggests that the organizations’ integrated
disclosures of material information appertaining to financial, manufactured, intellectual,
human, social and natural capitals will help them forge relationships with stakeholders as they
improve their legitimacy with institutions and other interested parties. Moreover, the
institutional theory, and its related concepts of isomorphism (Dacin, 1997; Deephouse, 1996)
and isopraxism (Adams, Potter, Singh and York, 2016) elucidates our interpretation on why
corporate reporting approaches are (not) converging toward integrated reporting. Secondly, it
critically analyzes specific aspects of GRI’s latest Sustainability Reporting Standards and sheds
light on the IIRC’s <IR> framework. It also investigates the costs and benefits of using
integrated reporting for the corporate disclosures on financial and non-financial performance.
The rationale for this contribution is to further consolidate the ‘integrated thinking and
reporting’ of the organizations’ capitals in clear, concise and comparable communications
(Perego Kennedy and Whiteman, 2016; Knauer and Serafeim, 2014). This paper is a useful
complement to the latest empirical studies that explore the causal relationships between the
corporate disclosures of ESG performance and organizational legitimacy. In addition, it links
key theoretical underpinnings on corporate sustainability and social responsibility literature to
the contemporary practices in corporate communication.
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Literature Review
Relevant academic literature suggests that the practicing organizations’ underlying motive
behind their non-financial disclosures is to maximize their financial capital and profit. This
argumentation is synonymous with many conceptual theories in academic literature that seek
to justify the rationale for voluntary, integrated reporting:
The Agency Theory
In the twentieth century, corporations were clearly distinguishing the difference between the
ownership and control of wealth. The business owners were considered as principals as they
employed executives (agents) to manage their firms. The executives acted as agents for the
principals, and they were morally responsible to maximize their shareholders’ wealth (i.e. the
principals’ wealth). The executives accepted their agents’ status because they perceived the
opportunity to maximize their own utility. The agency theory suggested that the company
executives and their principals are motivated by opportunities for their own personal gain
(Eisenhardt, 1989). Rightly so, the principals invest their wealth in profitable companies and
will probably design governance systems in ways that will maximize their investments. On the
other hand, agents accept the responsibility of managing their principals’ undertakings to
secure their employment prospects. However, at times, there may be divergences between the
managers and their principals. There may be situations where the agents may feel constrained
by their principals’ imposed structures and controlling mechanisms (Davis et al., 1997). This
matter may lead to unproductivity outcomes and could ultimately bring significant losses to
the principals themselves. The crux of the agency theory is that the principals are expected to
delegate authority to agents to act on their behalf. It is this delegated responsibility that at times
allows agents to opportunistically build their own utility at the expense of their principals'
utility. This happens when there are unaligned objectives; where managers may be motivated
by their individualistic, self-serving goals, rather than by being good stewards for their
principals (Eisenhardt, 1989).
The Stewardship Theory
The stewardship theory is the collective-serving model of behavior that is driven by the
organizations’ intrinsic values. In this case, the organization would do what is best for society
and the planet (Donaldson and Davis, 1991). The stewardship behaviors benefit principals
through the positive effects of profits on corporate dividends and share prices. Consequently,
the stewards place higher value on cooperation, rather than defection (these terms are also
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found in the game theory), because they perceive greater utility in collaborative behaviors.
Stewardship theorists assume that there is a strong relationship between successful
organizations and their principals’ satisfaction. The stewards protect and maximize their
shareholders’ wealth because by so doing, they maximize their utility functions toward
principals.
Stewards who successfully improve their organizational performance will also satisfy other
stakeholder groups who will have their own vested interests. Therefore, pro-organizational
stewards are motivated to maximize organizational performance, whilst satisfying the
competing interests of shareholders. The utility that they gain from pro-organizational
behaviors is higher than the utility that could be gained through individualistic, self-serving
behaviors. This theory suggests that stewards believe that their interests are aligned with those
of the corporation that engaged them (Muth and Donaldson, 1998). In practice, this theory’s
ideals are evidenced in IIRC’s <IR> Framework as it emphasizes the stewardship of multiple
capitals, including; financial, manufactured, intellectual, human, social and natural capital (IR,
2013). In the past, the accountability of social and environmental capitals has often been found
to be completely lacking in corporate disclosures (Adams et al., 2016; GRI, 2017). The
companies were not always presenting a true and fair view of their externalities, as they were
reluctant to promote their responsible and sustainable behaviors (Ioannou and Serafeim, 2017;
Eccles and Krzus, 2010). This may be due to a lack of awareness on the business case for such
activities (Camilleri, 2015). The organizations’ motivations for undertaking the stewardship
behaviors, including the ESG initiatives seem to fall into two converging camps: doing good
practices (this is consistent with the predictions of the stewardship theory) or doing well (this
is consistent with the institutional and legitimacy theories).
The Institutional Theory
Organizations react to the institutional pressures by adopting rules and procedures (Suchman
1995). Different components of the institutional theory explain how certain processes become
established as authoritative guidelines for societal behaviors. Very often, structures and
institutions are created, diffused, adopted, and adapted over space and time; and eventually
they may also fall into decline and disuse. This theory acknowledges that individuals and
organizations have the capacity to create, maintain, and change institutions through various
mechanisms (Meyer and Rowan 1977). Unlike the efficiency-based theories which focus on
profit maximization, or on the interactions between markets and governments; the institutional
theory considers a wider range of variables that could influence the decision-making processes
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in organizations, including; their span of control, job programmability and compensation
policy, among others (Eisenhardt, 1988). The situational variables arising from the immediate
job context and the broader organizational culture could influence the organizations’ normative
structures and reinforcement contingencies, including; the individual employees’ obedience to
authority, and their pressures to accept responsibility for their behaviors.
The institutional theory clarifies how firms respond to their surrounding environments where
they operate. Stakeholders, including; governments, regulatory authorities, NGOs, and other
organizations within the supply chain can exert their influence on businesses. Organizations
must conform to the institutional norms and rules that are prevailing in their operating
environment. As a result, their compliance with the formal regulations will earn them
legitimacy among stakeholders (Beck et al., 2015; Hahn and Lülfs, 2014; Dacin, 1997;
Deephouse, 1996; Suchman, 1995). Further research is showing how the institutions effect
organizational behaviors, particularly on CSR disclosure issues (Adams, 2015). Historically,
the notion of CSR has emerged from the institutionalized forms of social solidarity that have
emerged from liberal market economies. Therefore, the institutional theory offers promising
ways of investigating what lies at the heart of the publics’ concern as the corporations are
influenced by the institutions’ ethos, voluntary principles, policies and programs (Camilleri,
2015). Their responsible behaviors have often been triggered by socio-political forces and
pressure groups (Elving et al., 2015). In this case, CSR practice and its reporting rests on the
dichotomy between the corporations’ voluntary engagement and their socially-binding
responsibilities (Brammer et al., 2012). The fact that CSR disclosures remained a ‘voluntary’
practice in many contexts, is a clear reflection of the organizations’ institutional context (De
Villiers, Venter and Hsiao, 2017; Stacchezzini, Melloni and Lai, 2016; Camilleri, 2015).
Numerous institutions have played a dynamic role, both individually and collectively in the
development of integrated reporting (Jensen and Berg, 2012; Jackson and Apostolakou, 2010).
While governments have been the primary force for the promotion of financial reporting
standards through security exchange commissions; other institutions like the UN Global
Compact, OECD, ISO, GRI and IIRC, among others, as they have facilitated the growth and
diffusion of non-financial reporting mechanisms (Camilleri, 2015; Adams, 2015).
Isomorphism and Isopraxisim
Isomorphism has been constructed in conjunction with the applications of the institutional
theory (Dacin, 1997). This concept has been propagated through cultural and associational
processes that arise when ideas or innovations travel, and are adopted in different contexts
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(Dacin, 1997; Deephouse, 1996). For example, in this day and age, a previously-isolated island
society that makes contact with the rest of the globe, would quickly take on standardized forms
of economic forces, power relationships, and cultures that are similar to other nation-states
around the world. Similarly, the notion of isopraxism refers to ideas that are translated and
modified by different actors to suit their own needs. Isomorphism and its related notion,
isopraxism are potentially helpful to framing our interpretation of why integrated reporting
approaches may converge (or not) over time.
For example, the principles-based and non-mandatory <IR> Framework could potentially
create explicit and implicit reporting norms that could encourage the organizations’ non-
financial disclosures through integrated reporting. Humphrey, O’Dwyer and Unerman (2016)
argued that IIRC has claimed an institutional space which consists of competing, non-
integrated, sets of corporate reporting initiatives. They suggested that the <IR> framework
offers something to ‘everyone’ as it may appeal to new, enlightened long-term investors. In
this sense, isomorphism may be useful to understand how and why the disclosures of ESG
content can become widely accepted across companies, over time (Adams et al., 2016;
Deephouse, 1996). In a similar vein, isopraxism has been used to describe instances where
identifiable institutional forces may lead to new and different actions within specific
organizational and social instances. Therefore, isopraxism suggests that the legitimate
organizations may be intrigued to move toward more integrated approaches to reporting.
The Legitimacy Theory
Organizations prepare integrated reports in an attempt to maintain and repair their legitimacy
among stakeholders (De Villiers et al., 2017). Their sustainability accounting and disclosures
will usually reflect the institutional environments’ values and expectations (Camilleri, 2015).
As a result, responsible organizations become legitimate entities; particularly, if they comply
with the relevant societal rules and norms (Beck et al., 2015; Deegan, 2002). The organizations’
stakeholders will probably appraise the legitimate organizations who uphold their social
contract, when “their actions are desirable, proper, or appropriate within some socially-
constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574).
Therefore, the drivers of the institutional legitimacy may be influenced by the organizations’
external environment; according to the culturally-defined values and beliefs in society. On the
other hand, stakeholders will severely sanction irresponsible organizations when they do not
respect the societal norms and ethical values.
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Suchman (1995) described the concept of legitimacy as an operational resource assuming a
“high level of managerial control over legitimization processes” (p. 576). Similarly, Hedberg
and Malmborg (2003) contended that legitimate companies increased their credibility of their
CSR engagement among stakeholders. These authors used the GRI guidelines as a vehicle for
their organizational legitimacy. Other researchers suggested that legitimacy is strategic as it
emanates from recurring conflicts between management and stakeholders (Dacin, Oliver and
Roy, 2007; Suchman 1995). Arguably, the organizational legitimacy can be achieved by
forging strong relationships with stakeholders. For this reason, organizations ought to adapt
their corporate disclosures according to their stakeholders’ expectations, to garner their trust
and achieve legitimacy (Hahn and Lülfs, 2014). However, any changes in corporate reporting
should be driven by the organizations’ internal decisions on materiality (Eccles and Krzus,
2014). Hence, the managers’ agenda is to strategically enhance their organizational legitimacy
by reporting material information on their financial and non-financial performance.
The Corporations’ Non-Financial Disclosures
The American Institute of Certified Public Accountants’ Jenkins Report may be considered as
one of the major documents that has provided the foundations for non-financial disclosures
(Rivera-Arrubla, Zorio-Grima and García-Benau, 2017). Notwithstanding, there were other
guidelines that were developed by other non-governmental organizations (NGOs), including;
the Global Reporting Initiative, AccountAbility, Accounting for Sustainability (A4S), the
World Intellectual Capital Initiative (WICI), the Enhanced Business Reporting Consortium,
the CDP (formerly known as the Carbon Disclosure Project), the International Corporate
Governance Network, the Sustainability Reporting Standards Board and the Climate
Disclosure Standards Board, among others. The International Standards Organization (ISO),
Forest Stewardship Council (FSC), Greenpeace, Rainforest Alliance and Home Depot
Certifiable, Fair Trade and the US Department of Agriculture’s USDA Organic Labelling,
among others, have formulated uncertifiable, multi-stakeholder standards and instruments
(Castka and Corbett, 2016) to support organizations in their CSR communication. In addition,
certain listed corporations are adopting Fortune’s reputation index, the KLD Social index or
RepTrak (Camilleri, 2017). Such measures require corporate executives to assess the extent to
which their organization behaves responsibly towards the environment and the community.
Despite the development of these guiding principles and indices, their appropriateness remains
doubtful (Camilleri, 2017; Adams, 2015).
In 2010, the development of ISO 26000 had represented a significant milestone in integrating
socially and environmentally responsible behaviors into management processes (Toppinen,
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Virtanen, Mayer, and Tuppura, 2015; Hahn, 2013). ISO 26000 was developed through a
participatory multi-stakeholder process as the International Labor Organization (ILO) had
established a Memorandum of Understanding (MoU) to ensure that ISO’s social responsibility
standard is consistent with its own labor standards. In fact, ISO 26000’s core subject on ‘Labor
Practices’ is based on ILOs’ conventions on labor practices, including; Human Resources
Development Convention, Occupational Health and Safety Guidelines, Forced Labor
Convention, Freedom of Association, Minimum Wage Fixing Recommendation and the Worst
Forms of Child Labor Recommendation, among others. Moreover, ISO’s core subject on
‘human rights’ is based on the Universal Declaration of Human Rights (that was adopted by
the UN General Assembly in 1948). On the other hand, many academic commentators argue
that ISO 26000 has never been considered as a management standard (Camilleri, 2017). The
certification requirements have not been incorporated into ISO 26000’s development and
reinforcement process, unlike other standards, including ISO 9000 and ISO 14001 (Hahn,
2013). Notwithstanding, ISO 14001 belongs to a larger set of ISO 14000 certifications that
conform with the European Union's Eco-Management and Audit Scheme (EMAS) (Lueg et al,
2016).
The European Union (EU) has developed its non-binding guidelines for the non-financial
disclosures of large, public-interest entities that engage more than 500 employees (Stubbs and
Higgins, 2015; EU, 2014). The European Parliament mandated Directive 2014/95/EU on non-
financial reporting; that was subsequently ratified by the European member states. Therefore,
large undertakings are expected to disclose material information on their ESG behaviors.
These entities are required to explain any deviations from their directive’s recommendations
in their annual declaration of conformity, as per the EU’s “Comply or Explain” principle
(Camilleri, 2015; EU, 2014). Their non-financial disclosures include topics, such as; social
dialogue with stakeholders, information and consultation rights, trade union rights, health and
safety and gender equality, among other issues. Moreover, the organizations’ environmental
reporting could cover; material disclosures on energy efficiencies, the monitoring of efficiency
levels their energy generation capacities, assessments on the co-generation of heating facilities,
the use of renewable energy, greenhouse gas emissions, water and air pollution prevention and
control from the production and processing of metals, mineral industry, chemical industry,
waste management, livestock farming, etc. (EU, 2014). Therefore, large undertakings are
expected to bear responsibility for the prevention and reduction of pollution. The EU
recommends that the large organizations implement ILO’s Tri-partite Declaration of Principles
on Multinational Enterprises and Social Policy, as well as other conventions that promote the
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fair working conditions of employees. It also makes reference to the OECD Guidelines for
Multinational Enterprises, the 10 principles of the UN Global Compact, the UN Guiding
Principles on Business and Human Rights, and mentions ISO 26000 Guidance Standard on
Social Responsibility (EU, 2014). Following, the EU’s mandate for non-financial reporting,
it is expected that 6,000 European public interest entities will be publishing their sustainability
reports in 2018, covering financial year 2017-2018 (GRI, 2017).
Sustainability Reporting
In the past two decades, many entities started to incorporate economic, environmental and
social performance indicators that were reinforced and institutionalized through GRI’s
sustainability reporting guidelines (Stacchezzini et al., 2016; Simnett and Huggins, 2015;
Milne and Gray, 2013). The Global Reporting Initiative (GRI) was one of the earliest
proponents of sustainability reporting (Hahn and Lülfs, 2014; Hedberg and Von Malmborg,
2003). GRI was formed in 1997 by two United States-based non-governmental organizations,
namely; Coalition for Environmentally Responsible Economies (Ceres) and Tellus Institute, in
collaboration with the United Nations Environment Program (UNEP). In 2000, GRI released
its Sustainability Reporting Guidelines during the World Summit for Sustainable Development
in Johannesburg. In 2013, GRI’s Sustainability Reporting Guidelines were promoted as the G4
guidelines. Eventually, the G4 Guidelines were superseded by the GRI Sustainability
Reporting Standards (GRI Standards) on the 1st July 2018.
GRI claims that its latest Standards represent global best practice for the public reporting
on a range of economic, environmental and social impacts. The GRI report preparers are
expected to provide material information about their organizations’ positive or negative
contributions to sustainable development. Their sustainability report should include three
Universal Standards, namely; GRI 101 (foundation), GRI 102 (general disclosures) and GRI
103 (management approach).
GRI 101 is the starting point for using GRI standards as it presents the Reporting Principles
that define the content and quality of the disclosures. It explains the basic processes and the
fundamental requirements for the reporting of material topics. GRI 102 describes the contextual
information on the organization’s profile, strategy, ethics (and integrity), governance,
stakeholder engagement practices, and reporting process. This section provides the context for
subsequent, more detailed reporting on the organizations’ economic, environmental and social
impacts. GRI 103 provides narrative information of how organizations identify, analyze and
respond for their economic, environmental and social impacts. Whilst GRI 200 (Economic),
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GRI 300 (Environmental) or GRI 400 (Social) Standards have been designed to enhance the
global comparability and quality of information on the organizations’ impacts, thereby
enabling greater transparency and accountability of practitioners (GRI, 2016).
The sustainability disclosures have a lengthy tradition of voluntary reporting, unlike the
corporations’ financial statements (Stubbs 2015). The proponents of the voluntary reporting
argue that the businesses respond to their stakeholders’ requirements, by being accountable
and transparent about their sustainability. While the businesses may willing to embed
sustainable practices in their operations, many stakeholders may question the reliability of
the voluntary sustainability reports. While it may appear that businesses may support the
voluntary approaches, relevant research suggests that in some contexts they may support
mandatory approaches (de Villiers and van Staden, 2011). Beck et al. (2017) reported that the
organizations’ relationship with external guidelines has evolved from their compliance as a
means of seeking external legitimation to the present pragmatic position, where their ESG
disclosures are informed by the organization’s strategic positioning, and not constrained by the
promulgation of voluntary guidelines.
Very often, the practitioners’ sustainable performance is not independently verified or
assured (Stubbs, 2015). GRI prescribed the threshold for the definition of the material topics
whilst describing the context of the reporting organization. In a similar vein, AccountAbility
recommends the materiality tests, as practitioners are expected to communicate on their
transparent processes of stakeholder engagement. Organizations are subjected to external
assurance mechanisms, that examine the process and the results (Maroun, 2018). However, in
practice, the report preparers are not always adopting all of the standard setters’ guidelines
(Eccles and Krzus, 2014). This argumentation strengthens the case for the regulatory
approaches to address the lack of enforcement mechanisms as enforceable rules can foster
compliance and credible report assurance practices (Maroun, 2018). The regulations will only
provide the minimum norms with which corporations have to comply (Ioannou and Serafeim,
2014). Lately, the sustainability reporting is evolving to include more interdependencies with
the financial information (Camilleri, 2017) as environmental, social and governance issues are
embedded into the organizational strategy (Jensen and Berg, 2012).
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Integrated Reporting
An increasing number of academics, governments, audit firms, interest groups and businesses
are advocating the publication of integrated disclosures that link financial and ESG
performance in one report (de Villiers and Maroun, 2017; Beck et al., 2017; Adams, 2015;
Eccles and Krzus, 2010). The organizations’ ethical behaviors are often equated with their
obligation to disclose a true and fair view of their financial and non-financial performance
(Maniora, 2015; Simnett and Huggins, 2015; Adams, 2015; EU, 2014).
In the aftermath of the global economic and financial crisis of 2007–2008, many policy makers,
regulatory authorities and leading financial institutions were willing to improve the content of
their corporate reporting. At the same time, there was an increased awareness on how the
communication of ESG issues could help them enhance their corporate reputation and image
(Camilleri, 2015). As a result, in 2010, the Prince of Wales’ Accounting for Sustainability
Project together with the Global Reporting Initiative (GRI), and the International Federation of
Accountants (IFAC) established the International Integrated Reporting Committee (IIRC).
Subsequently, it changed its name to International Integrated Reporting Council. The IIRC’s
<IR> framework has somewhat addressed the perennial criticisms and shortcomings of
sustainability reporting, as it considered all of the organizational capitals (Stacchezzini et al.,
2016; Jensen and Berg, 2012). Other major changes brought about by IIRC was an increased
emphasis on materiality (Montecalvo, Farneti and de Villiers, 2018).
An Appraisal on Integrated Reporting
IIRC’s <IR> framework has aligned financial and non-financial capital allocations with
specific corporate behaviors (Fasan and Mio, 2017; Camilleri, 2017). It has categorized
different stocks of value, including; Financial Capital; Manufactured Capital; Intellectual
Capital; Human Capital; Social (and Relationship) Capital; as well as Natural Capital (IR,
2013). IIRC explains how industry and firm-level characteristics (including; board size and
diversity) can play a significant role in the determination of material, non-financial disclosures.
Therefore, the concept of materiality is fundamental to its audit and assurance (Eccles, and
Krzus, 2014). García-Sánchez and Noguera-Gámez (2017) suggested that IIRC’s <IR> tool
can help to mitigate agency problems and can also improve the quality of material information
for investors. IR facilitates corporate decision-making as it breaks down operational and
reporting silos, resulting in improved systems and processes (Stubbs and Higgins, 2015).
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The <IR> framework’s strategic focus calls for both internalization and externalization
processes. Internalization is a process through which the organization’s human resources adopt
the framework’s external ideas, opinions, views or concepts, as their own. This process starts
with learning about the reporting framework. Afterwards, the report preparers will be in a
position to understand how its implementation makes sense to their organization, as a whole.
The internal stakeholders will probably experience a process of adaptation until they finally
accept that their organization’s integrated reporting of financial and non-financial capitals
creates value for them, over time. Thus, the internalization process can be understood as a
process of acceptance of a new set of norms and working practices that could ultimately
improve the organization’s holistic performance in the long term. The organizations’ internal
transformation may lead to significant changes in ‘integrated thinking’, as they embed ESG
performance with their strategic and operational processes.
The organizations’ non-financial disclosures will shed light on the externalities that affect their
stakeholders, the environment and other unrelated parties. In other words, through integrated
reporting; the internal effects of integrated reporting are finally externalized outside the
organizations’ boundaries. At times, organizations may intentionally or unintentionally conceal
ESG information from their corporate reporting. Such unethical practices may result from
conscious or unconscious organizational behaviors, or from corporate misconduct when
dealing with extensive information outputs. Hence, IIRC’s <IR> framework encourages
organizations to report both positive and negative behaviors that substantively affect their
ability to create value over the short, medium and long term. Practitioners are also expected to
provide adequate and sufficient contextual information about their capitals in their corporation
communication. Nevertheless, despite the increased proliferation of integrated disclosures,
only a few scholars have taken an optimistic stance on IR (Lai et al., 2018; Maroun, 2018;
Flower, 2015; Stubbs and Higgins, 2014).
A Critique on Integrated Reporting
A few commentators argued that IIRC’s framework focuses on the information demands
of capital providers, and did not address the decision-making and accountability needs of
other stakeholders (Brown and Dillard, 2014). Rensburg and Botha (2014) suggested that
the integrated reports should be simplified and made comprehensible to a wider stakeholder
audience. They maintained that this report should be easily understood by the general public.
Stubbs and Higgins (2014) argued that IR focuses on the ‘supply side’, namely, the preparers
of the corporate statements, whilst leaving out the ‘demand side’, i.e. the market stakeholders.
14
These authors held that there was a significant gap between the information that was supplied
by the reporting companies and the information that was sought by the financial markets. De
Villiers et al. (2014) contended that the close connections between the report preparers
and the investors can limit its potential to help other stakeholders to better understand the
non-financial impacts of their organization.
Other researchers maintained that the IIRC’s framework comprised ambiguous meanings and
assessments of non-financial capitals, that have inevitably led to complexities in the assurance
mechanisms of integrated reports (Maroun, 2018; Cheng, Green, Conradie, Konishi and Romi,
2014). Notwithstanding, the integrated disclosures are not scrutinized by externally-recognized
assurance mechanisms. Rivera-Arrubla et al. (2016) reported that the level of the corporate
disclosures is significantly associated with the specific contextual environment (i.e. region and
industry) of the practitioners. Therefore, the report preparers ought to identify the recipients
(i.e. the users) of their integrated reports (Adams et al., 2016). Pistoni, Songini and Bavagnoli
(2018) noticed that the IR reports were not disclosing appropriate information on their business
model, strategic priorities, and on their companies’ value creation processes; as more attention
was devoted to the form of the IR disclosures, rather than on their content. Flower (2015)
posited that investors and societal stakeholders have different needs and expectations. A
number of criticisms have been levelled at IR, particularly on its emphasis to satisfy the
financial capital providers, to the detriment of other key stakeholders (Cheng et al., 2014).
Businesses tend to focus on creating value through profit maximization for their capital
providers (Rowbottom and Locke, 2016; Flower, 2015; Adams, 2015; Van Bommel, 2014;
Eisenhardt, 1989). Therefore, IR offers a limited approach to ensure the corporate
accountability toward stakeholders (Brown and Dillard, 2014; Flower, 2015). Whilst,
investors and creditors require financial information regarding their future profitability,
external stakeholders expect broad-based information, irrespective of corporate interest. These
stakeholders, including the organizations’ customers (and prospects), suppliers, regulatory
authorities, and the community at large, hold different views on what capital should be
emphasized (Van Bommel, 2014). Flower (2015) argued that report preparers had no
obligation to disclose their externalities (on the environment), where there is no subsequent
impact on their firm. Similarly, Perego et al. (2016) hinted that the report preparers made
different value judgments when anchoring the effects of their ESG information. It is very
unlikely that they trade-off different forms of financial and non-financial capital, in line
with the requirements of IIRC’s framework (de Villiers et al., 2017).
15
By adopting key financial reporting conventions, and linking materiality to value creation,
IR might not extend the accountability of the organizations’ capitals (Deegan,
2013). Moreover, Brown and Dillard (2014) claimed that IR actually centers more on
stakeholder management rather than on stakeholder accountability. Such argumentation
suggests that academia is not convinced that IR has successfully improved the corporate
accountability on financial and non-financial performance. Perhaps, the accountancy
profession should exercise its authority over the institutional processes in order to bring a
fundamental shift in framing the accountability, reporting and assurance of the
organizations’ ESG performance (Lai et al., 2018; Beck et al., 2017).
Conclusions and Future Research Avenues
The practice of sustainability and integrated reporting has evolved because of the stakeholders’
needs for corporate communication. Relevant academic literature has yielded many
recommendations, ideas and concepts that have surely improved the quality of corporate
reporting. A critical review of different regulatory tools and voluntary instruments for the
organizations’ financial and non-financial disclosures suggests that the practice of integrated
reporting represents a new strand for the communication of corporate responsible and
sustainable behaviors. Therefore, this research adds value to academic knowledge by linking
key conceptual developments from the business ethics literature with the contemporary
developments in corporate communication. This contribution explains that the agency,
stewardship, institutional and legitimacy theories have anticipated the development of the
sustainability standards and led to the organizations’ integrated reporting of financial and non-
financial capitals. The author has presented an appraisal and a critique of GRI’s latest
Sustainability Reporting Guidelines and of IIRC’s <IR> framework, and its content elements.
Businesses and other entities can use IR to communicate about the strategic positioning of their
financial and non-financial capitals to stakeholders. The investors and the other financial
stakeholders remain the key stakeholders of many organizations, and they continue to
represent the primary recipients of the corporate reports. However, other stakeholders are
also putting pressure on corporations and public interest entities to disclose more information
on social issues and on matters relating to governance, environmental sustainability in their
annual statements. This is in line with the aim of IR, as both financial and non-financial
stakeholders have basic, convergent expectations about the companies’ strategies (IIRC,
2013). Therefore, the integrated disclosures of material information appertaining to financial
and non-financial performance will help them forge important relationships with different
16
stakeholders, as they improve their stewardship and legitimacy with institutions and other
interested parties.
The findings of this paper suggest that IR has provided a passive avenue for the legitimization
of corporations and large entities (Maroun, 2018; de Villiers et al., 2017; Adams et al., 2015;
Beck et al., 2015; Dacin et al., 2007; Brown and Deegan, 1998) among stakeholders, as
responsible organizations can disclose material information on their financial, manufactured,
intellectual, human, social and natural capitals. Despite the critiques and the inherent
limitations of IR that were duly covered in this paper, the researcher believes that in future
organizations should be encouraged to disclose a true and fair view of their holistic activities,
by including material aspects on their non-financial performance. This implies that the report
preparers may require a dynamic process of adaptation, learning and action, as they have to
redesign, implement and control their strategic and operational procedures that lead to
“integrated thinking”. Hence, they will be in a position to incorporate financial and non-
financial capitals in their IR disclosures.
In conclusion, this contribution implies that there is scope for organizations to consolidate their
‘integrated thinking and reporting’ in clear, concise and comparable communications. It
suggests that the integrated disclosures of the organizations’ capitals and their value-creating
activities could catalyze positive behavioral changes in society and the environment. Therefore,
future research could investigate the difficulties in the corporate accounting of non-financial
capitals, as well as the audit and assurance of their integrated reports. To date, there is still
scant empirical evidence on how IR can be used for the corporate communication of the
businesses’ holistic activities, and little is known about the effectiveness of IR for
organizational stewardship and legitimacy.
Acknowledgements
The author declares that he does not have any potential conflict of interest. He was not
supported by third parties.
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