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Abstract
This paper develops a measure for integrated report quality and explores possible drivers of high-quality reporting considering a sample of large listed companies in 2015 and 2016. Data are collected from South Africa where integrated reporting has been established for a number of years and where companies have had the time to interpret and apply reporting guidelines. A detailed content analysis is used to construct a quality measure representing an accumulation of different indicators from the environmental and sustainability reporting literature. The quantity of information disclosed, the emphasis placed on different disclosures and the use of quantitative or qualitative disclosures are considered. Whether disclosures are substantive or symbolic and how easy it is for stakeholders to interpret integrated reports based on the use of infographics is also taken into account when gauging report quality. The results show that, while integrated reporting has become well established in South Africa, there is considerable room for improvement. Most disclosures are qualitative and symbolic rather than quantified and substantive. A combination of Kruskal-Wallis and Mann-Whitney U-tests shows that companies with higher quality integrated reports are those which invest in complementing their integrated reports with a sustainability report and having their disclosures externally assured. Company size, environmental and social impact, the use of a sustainability committee and compliance with the Global Reporting Initiative do not necessarily influence report quality. These findings suggest that, as integrated reporting matures, external factors contribute less to the quality of reporting and internal processes become more relevant.
Acknowledgements
The authors are grateful to Lelys Maddock, Philna Coetzee, Danielle Cerbone, Charl de Villiers and Wayne van Zijl for comments on earlier versions of this research.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 These committees can have different names depending on jurisdiction and context. Examples include: corporate social responsibility committee; social and ethics committee and sustainability committee. In South Africa, in particular, the work of a social and ethics committee may overlap with a risk and/or audit committee. For brevity, we refer to committees tasked with monitoring the preparation of an integrated report and an organisation’s environmental, social and governance (ESG) performance as a sustainability committee.
2 As explained in Section 2, in 2009, King-III was released and introduced the concept of preparing an integrated report. This was followed, in 2011, with a discussion paper on integrated reporting by the Integrated Reporting Committee of South Africa (IRCSA).
3 These include: financial, manufactured, intellectual, human, social and relationship and natural capital (see IIRC, Citation2013, pp. 11–12).
4 Examples include, in alphabetical order, Australia, Germany, New Zealand, India, South Africa, the UK and the USA.
5 We do not follow the same approach as Michelon et al. (2015) and use a OLS regression model to derive a quantity score due to the relatively small sample size and the fact that the JSE is not as efficient as the capital market studied by Michelon et al. (2015). For the purpose of comparing each company to an industry average score, the JSE market classifications have been used in order to limit researcher subjectivity.
6 For example, one company discussed its plans to reduce its carbon emissions at its plant in the operational review of its integrated report. It also discussed the same plan in its environmental performance (in a different part of the integrated report) and as part of its GRI compliance (in a third section of the report). This was treated as a single case of reporting on carbon emissions and managing the organisation’s impact on natural capital.
7 If a sentence included a mix of qualitative, quantitative or monetary information, the highest applicable score was awarded.
8 Some of these components of usability were addressed by other measures of IR quality. For example, information availability was addressed by only obtaining integrated reports from official entity websites. Usefulness and adaptability were addressed by the measurement indicator Relevance was dealt with by the relevance indicator. Only the ease of interpretation was captured directly.
9 In 2009, King-III was introduced and adopted for the first time by most companies in their 2010 or 2011 reporting periods. As explained in Section 2, a discussion paper on integrated reporting was released in 2011 followed by the IIRC’s framework in Citation2013. These would have been applied for the first time in companies’ 2012, 2013 or 2014 financial years. No changes to the reporting environment took place during 2015 and 2016. During 2017, King-III was replaced by King-IV.
10 Financial statements were initially excluded from the analysis. Findings were not affected by including information contained in companies’ financial statements. This is because financial statements are prepared in accordance with International Financial Reporting Standards and focus specifically on financial capital rather than on all of the integrated reporting content elements.
11 If the recording unit included ESG information and either financial or operational details, it was classified as non-financial. This avoided having to distinguish between the extent to which financial or non-financial issues were being stressed in each recording unit and, in turn, limited the subjectivity of the data collection process.
12 The researchers also considered if it would be more appropriate to use a multiple regression model complemented by appropriate endogeneity tests. Due to the relatively small sample size and related concerns about normality of residual errors, it was concluded that a Mann-Whitney U-test would be a more robust alternative. This is especially true given that the aim of this paper is not to develop a model which explains variances in quality measures or attempts to establish a causal relationships. For the same reasons, a structural equation model is not developed.
13 EY does not publish individual score sheets. It publishes broad categorical scores ranging from 1 (progress to be made) to 5 (for the top 10 reports).
14 Table 4 shows that RI decrease as size and environmental/social impact increases but the correlations are not statistically significant.
15 Due to the relatively low correlation between firm size and industry as per Table 4, coupled with the small sample, a test on the combined effect of firm size and industry is not performed.