Materiality in an integrated reporting setting: Insights using an institutional logics framework

Journal Pre-proof Materiality in an integrated reporting setting: insights using an institutional logics framework Dannielle Cerbone, Warren Maroun PII:

S0890-8389(19)30101-5

DOI:

https://doi.org/10.1016/j.bar.2019.100876

Reference:

YBARE 100876

To appear in:

The British Accounting Review

Received Date: 24 September 2017 Revised Date:

5 December 2019

Accepted Date: 13 December 2019

Please cite this article as: Cerbone, D., Maroun, W., Materiality in an integrated reporting setting: insights using an institutional logics framework, The British Accounting Review, https://doi.org/10.1016/ j.bar.2019.100876. This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. © 2019 Elsevier Ltd. All rights reserved.

Materiality in an integrated reporting setting: insights using an institutional logics framework Dannielle Cerbone & Warren Maroun University of the Witwatersrand, School of Accountancy Corresponding author contact: [email protected]

Abstract Using institutional logics as a theoretical framework and interviews with 20 preparers from 14 large organisations, listed on the Johannesburg Stock Exchange (JSE), this paper focuses on examining differences in integrated reporting practices. The results reveal how a finance-centric market and professional logic interact with a stakeholder logic leading to differences in the materiality determination process. Market-dominated firms have an internally focused approach to setting materiality which emphasis value-relevance for financial capital providers. Where logics are contested, materiality becomes an amalgamation of the factors which are important for shareholders and other stakeholders and essential for demonstrating compliance with codes of best practice. Organisations with a market, professional and stakeholder logics aligned have the most sophisticated materiality determination processes. The emphasis shifts from lengthy reporting and compliance to providing a comprehensive account of the value creation process and how the business ensures long-term sustainability. In this way, how logics are instantiated may explain the considerable variation being observed in integrated reports. There are also implications for the propensity of firms either to view integrated reporting as a hegemonic challenge or to internalise it as part of a process of positive organisational change.

Key words: sustainability reporting, materiality, institutional logics, integrated reporting; stakeholder engagement. Acknowledgements The authors are grateful to Professors Atkins, Garnett, Michelon and Parker for their comments on earlier versions of this paper as well as the participants at the Meditari Accountancy Research Conference (2015 & 2016). The authors would like to thank Lelys Maddock for her invaluable editorial services

This work is based on research supported in part by the National Research Foundation of South Africa (Grant Number: 118525)

Materiality in an integrated reporting setting: insights using an institutional logics framework

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Abstract Using institutional logics as a theoretical framework and interviews with 20 preparers from 14 large organisations, listed on the Johannesburg Stock Exchange (JSE), this paper focuses on examining differences in integrated reporting practices. The results reveal how a financecentric market and professional logic interact with a stakeholder logic leading to differences in the materiality determination process. Market-dominated firms have an internally focused approach to setting materiality which emphasis value-relevance for financial capital providers. Where logics are contested, materiality becomes an amalgamation of the factors which are important for shareholders and other stakeholders and essential for demonstrating compliance with codes of best practice. Organisations with a market, professional and stakeholder logics aligned have the most sophisticated materiality determination processes. The emphasis shifts from lengthy reporting and compliance to providing a comprehensive account of the value creation process and how the business ensures long-term sustainability. In this way, how logics are instantiated may explain the considerable variation being observed in integrated reports. There are also implications for the propensity of firms either to view integrated reporting as a hegemonic challenge or to internalise it as part of a process of positive organisational change. Keywords: sustainability reporting, materiality, institutional logics, integrated reporting

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1. Introduction Over the past two decades, there has been a shift in the focus of corporate reporting from traditional financial statements to a sustainability and, most recently, an integrated reporting philosophy (De Villiers et al., 2014; Stubbs and Higgins, 2014). An integrated report should provide a succinct and easy-to-understand explanation of how a company manages multiple types of capital to generate sustainable returns over multiple timeframes (Institute of Directors of Southern Africa [IOD], 2009; International Integrated Reporting Council [IIRC], 2013). Founded on a holistic approach to business management, an integrated report is part of a comprehensive strategic framework, focused on long-term value creation and contributing to positive organisational change (Eccles and Krzus, 2010; Solomon and Maroun, 2012). As an emerging form of reporting, there is considerable variation in how the IIRC’s framework is being interpreted and applied by preparers (De Villiers et al., 2014; Robertson Fiona, 2015). For example, the focus and extent of environmental, social and governance (ESG) disclosures included in integrated reports differ significantly among organisations, even when these are in the same industry (Solomon and Maroun, 2012). Strategic analysis, risk assessment and risk management are not always covered in the same detail in integrated reports (PwC, 2015), despite being identified as core elements by the IIRC (2013). Variations in how companies determine if information is material offers a possible explanation for these divergent reporting practices (Edgley et al., 2015; Lai et al., 2017) and provide a basis for this research. Drawing on Besharov and Smith (2014) and Edgley et al. (2015), the factors which contribute to market, professional and stakeholder logics being instantiated in a firm’s values or identities (centrality) and the implications for consistency in reporting practices (compatibility) are highlighted. This provides a framework for examining how firms define, apply and report on materiality. The study’s contribution is theoretical, empirical and practical. A growing body of research examines different aspects of integrated reporting at the institutional and organisational-level (Rinaldi et al., 2018). For example, the limitations of (Flower, 2015; Thomson, 2015) and barriers to implementing the IIRC’s framework (Dumay et al., 2017; McNally et al., 2017) have been addressed. There are examples on the application of integrated reporting from developed (Gibassier et al., 2018) and developing (Macias and Farfan-Lievano, 2017) economies. The prior research debates the extent to which integrated reporting contributes to organisational change and enhanced accountability (Dumay and Dai, 2017; Guthrie et al., Page 3 of 40

2017; Silvestri et al., 2017; Al-Htaybat and von Alberti-Alhtaybat, 2018; Lai et al., 2018; McNally and Maroun, 2018; Higgins, 2019). This is complemented by a review of how narrow conceptualisations of performance constrain integrated thinking and reporting, valuecreation and sustainability (Brown and Dillard, 2014; Stubbs and Higgins, 2014; Vesty et al., 2018). Others evaluate different aspects of integrated report quality (Robertson Fiona, 2015; du Toit, 2017; du Toit et al., 2017; Van Zijl et al., 2017; Malola and Maroun, 2019), its application by smaller concerns (Del Baldo, 2017) and the role of assurance for ensuring more reliable reporting to stakeholders (Briem and Wald, 2018; Maroun, 2018; Wang et al., 2019; Zhou et al., 2019). This goes hand-in-hand with an emerging body of work on the value-relevance of integrated reporting and its role in reducing information asymmetry (Barth et al., 2017; Zhou et al., 2017; Slack and Tsalavoutas, 2018; Caglio et al., 2019). How materiality is defined, internalised and operationalised is, however, seldom considered (Lai et al., 2017; Rinaldi et al., 2018; Beske et al., 2019) From a broader perspective, much of the prior environmental and sustainability reporting literature uses legitimacy theory applied from a managerial perspective. A common assumption is that decisions at the organisational level appeal to a unified or coherent set of stakeholder values (Suchman, 1995) and are used to manage impressions (Deegan, 2002; O’Donovan, 2002), deflect criticism (Patten, 2002; De Villiers and van Staden, 2006) or respond to hegemonic challenges by the sustainability movement (Milne et al., 2009; Tregidga et al., 2014). An institutional logics framework is more nuanced. It caters to variations in expectations and distinguishes between factors which influence value systems and practices (Thornton and Ocasio, 1999; 2008). At the same time, the level of analysis is not confined to the organisation; the relevance of institutional or professional fields and degree of commitment to knowledge bases, customs and techniques by individual firm members are also taken into account (Besharov and Smith, 2014). As a result, this study is able to address calls for additional research on the relevance of professional groupings (Humphrey et al., 2017), firm-specific contingencies (Rinaldi et al., 2018) and the socialisation of individual accountants (Cooper and Robson, 2006; Stubbs and Higgins, 2014) for the development of specific integrated reporting practices. This paper is structured as follows: Section 2 explains the theoretical framework and develops a model for evaluating variations in reporting practices. Section 3 explains the method. Section 4 presents the results. Section 5 discusses findings and concludes.

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2: Theoretical framework and prior literature Thornton and Ocasio (1999) define institutional logics as: The socially constructed, historical patterns of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space and provide meaning to their social reality (p. 803). The ‘instantiation’ of societal-level logics at the organisational-level is affected by several factors such as the context in which an entity operates, its strategy or mission, dependency on key resources and the experiences and identities of its agents (Besharov and Smith, 2014). Equally relevant are individuals making up a firm (Thornton and Ocasio, 2008). How they interpret and apply principles, rules or practices can ‘reinforce and challenge the assumptions, values, beliefs, and rules considered appropriate within a particular realm of social life’ (Besharov and Smith, 2014, p. 7). The result is that prescriptions do not have a deterministic impact on human behaviour: in each situation, humans have some margin for manoeuvre which they can use to invent responses depending on the circumstances of the system in which they are situated (Tremblay and Gendron, 2011, p. 262). In the process of defining the boundaries of what constitutes acceptability, a given logic is subject to a process of subjective ‘sense-making’, varied interpretation and application in different settings, resulting in changes in the logic boundary (see also Llewellyn, 1994; Cooper and Robson, 2006; Durocher and Gendron, 2014). In some cases, a dominant logic takes hold and provides the schematic for how an organisation operates and is managed with alternate logics having little effect. In other instances, similar logics coalesce to form a type of hybrid perspective while internal conflict results if logics are incompatible (Besharov and Smith, 2014). To explain the heterogeneity of how multiple logics are operationalised in an organisational context, Besharov and Smith (2014) categorise logic multiplicity according to two dimensions: compatibility and centrality. Compatibility

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Compatibility is defined as ‘the extent to which the instantiations of logics imply consistently and reinforcing organisational actions’ (Besharov and Smith, 2014, p. 10). Compatibility can be influenced by economic pressures, levels of bureaucracy or the operation of internal policies or targets (Fogarty, 1992). Each is a source of powerful coercive pressure. These can be complemented by mimetic forces resulting from the ‘norms’ of professional framing and emphasis on replicating outcomes which are perceived as desirable or appropriate (DiMaggio and Powell, 1983; Fogarty, 1992). When a single profession is dominant, or there are few overlaps on the professional ‘field’, incompatibility among logics is either avoided or rendered moot (Besharov and Smith, 2014). Conversely, compatibility is lower when an organisation is dependent on multiple professional groups which subscribe to different knowledge bases and compete for jurisdictional control (Greenwood et al., 2011). To increase compatibility, organisations can recruit individuals who do not adhere to a given knowledge base or institutional perspective. These ‘organisational actors’ can be exposed and trained according to an integrated value system which incorporates features of two or more logics rather than presenting logics as opposing perspectives on a firm’s goals and how to achieve them (Besharov and Smith, 2014). Similarly, high levels of dependency on other firm members can result in a shared understanding and reconciliation of otherwise incompatible logics in the interest of pragmatism and the desire to achieve common goals (McPherson and Sauder, 2013). Centrality Centrality is: The degree to which multiple logics are each treated as equally valid and relevant to organizational functioning. Centrality is higher when multiple logics are instantiated in core organizational features that are central to organizational functioning. It is lower when a single logic guides core operations while others manifest in peripheral activities not directly linked to organizational functioning (Besharov and Smith, 2014, p. 12). When an organisation is characterised by the concurrent operation of different knowledge bases, disciplines or fields, isomorphic pressures result in higher centrality (Meyer and Scott, 1983). This is especially true when individuals on whom an organisation is dependent have authority and influence and subscribe to different views on how the business should be organised and managed. Similarly, when an organisation’s mission and strategy give rise to Page 6 of 40

more complex business models and operating environments (Besharov and Smith, 2014) or the company is faced with a change in societal values and stakeholder pressures (Suchman, 1995; Mitchell et al., 1997), it must draw on a range of different logics to ensure continuity and centrality increases. Resource-dependency is a related consideration. An organisation reliant on a particular constituency must acquiesce to some of their demands even if these are not consistent with the entity’s primary objectives (Dowling and Pfeffer, 1975; Suchman, 1995). Consequently, organisations subject to varying regulatory, political and cultural contexts may be characterised by higher centrality as they seek to balance the expectations of different stakeholders. Similarly, firms with multi-disciplinary teams completing core tasks will be exposed to the technical and cogitative demands associated with respective fields or disciplines (Besharov and Smith, 2014). Finally, despite significant isomorphic pressures, individuals will internalise, adhere to and apply rules, regulations and recommended practices to different extents allowing for deviations from or amalgamations of logics (Llewellyn, 1994; Durocher and Gendron, 2014). Alternately, while conflicting logics may co-exist, these are subject to formal and informal ‘trials of strength’ driven by proponents of each logic. The level of logic ‘commitment’, power differentials and relationships among firm members impacts how individuals respond to pressures at the professional or field-level and, in turn, how logics inform behaviour or are resisted (see, for example, Reay and Hinings, 2009; Tremblay and Gendron, 2011). 2.1 Implications of multiple logics In some cases, inconsistencies between logics result in tension and this is resolved by the emergence of either a dominant or hybrid logic which reflects the plurality of the firm (Besharov and Smith, 2014). In the interim, competing logics create ambiguity providing a framework for explaining variations in individuals’ beliefs and practices (Lounsbury, 2008) or presenting change processes as an exercise in substituting or merging logics (Edgley et al., 2015). Refer to Figure 1.

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Figure 1: Centrality vs compatibility

Degree of centrality

High Multiple logics are core to

Contested

Aligned

Extensive conflict

Minimal conflict

Estranged

Dominant

Moderate conflict

No conflict

Low

High

Logics provide

Logics provide

contradictory

compatible prescriptions

prescriptions for action

for action

organisational functioning

Low One

logic

organisational and

other

is

core

to

functioning logics

are

peripheral

Degree of compatibility

(Reproduced from Besharov and Smith, 2014, p. 16)

Organisations with low compatibility and high centrality may be characterised by internal conflict (Battilana and Dorado, 2010). In contested environments, multiple logics inform the business strategy and ethos but without a clear hierarchy of logics, firm members are unable to agree on the key objectives and how best to achieve them. This has adverse implications for internal efficiency, operating dynamics and maintaining legitimacy (Pache and Santos, 2010; Besharov and Smith, 2014). Contestation is not a default position. When faced with uncertainty due to the operation of multiple logics, organisations can decouple (Meyer and Rowan, 1977) or counter-couple (Lipson, 2007) core tasks from ceremonial displays of structure and processes to respond to competing logics and the resulting institutional ambiguity. Inconsistent activities can be decoupled by delegating them to separate parts of an organisation. These fall under different professional groups which take responsibility for technical and procedural rigour. Defining and measuring actual performance is avoided while inspection, monitoring and review to ensure the alignment of core objectives becomes ceremonial rather than substantive (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). To maintain appearances, the organisation’s goals are not defined and strategies, actions Page 8 of 40

and competing objectives are not reconciled. Day-to-day activities vary according to circumstances while stakeholders operate on the assumption that strategies, goals and structures are coherent, notwithstanding any unresolved inconsistencies at the technical level (Suchman, 1995). Decoupling allows an organisation to balance competing logics yielding lower centrality and reducing tensions between structural appearance and technical practices. Counter-coupling is similar to decoupling but involves an inverse relationship between an organisation’s policies and actions (see Lipson, 2007; Cho et al., 2015). As explained by Brunsson (2003, p. 205-206): talk or decisions in one direction decrease the likelihood of corresponding actions, and actions in one direction decrease the likelihood of corresponding talk and decisions. Faced with stakeholders’ competing demands and the applicability of different logics, counter-coupling allows an organisation to construct alternate accounts of itself. Specific plans and actions can be reserved for the most influential constituents while those with less authority can be placated with longer-term commitments, broad policy statements and expressions of goodwill (see, for example, March and Olsen, 1998; Milne et al., 2009; Tregidga et al., 2014). Duplicity is not the aim; different facades are generated which allow the organisation to manage conflicting stakeholder objectives simultaneously (Cho et al., 2015). By providing a mechanism for ranking competing logics and tailoring the organisation’s strategy and mission according to stakeholder power, centrality is lowered. Neither counter-coupling nor decoupling resolves the underlying inconsistencies between competing logics. Firms must ‘still contend with one or more subsidiary logics at odds with the dominant logic’ leading to, at least, some conflict. Nevertheless, even if policies and actions remain inconsistent, secondary logics are ‘estranged’ rather than contested because any uncertainty can be resolved in favour of dominant logics (Besharov and Smith, 2014, p. 19). If one logic becomes the primary driver of the entity’s core values and practices, a reduction in centrality and increase in compatibility result in even less ambiguity and conflict. Like the estranged organisation, the business mission and identity are informed by a single logic with other logics marginalised or re-enforcing the dominant one. While secondary logics influences some individuals, these yield complementary objectives and practices and internal conflict is reduced (Jones et al., 2012; Besharov and Smith, 2014).

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Finally, multiple logics can result in a state of alignment when they are treated as ‘equally valid [for] and relevant to organisational functioning’. This occurs when they are grounded in an organisation’s primary, rather than ‘peripheral’, activities (Besharov and Smith, 2014, p. 13). For example, if key parts of an organisation fall under distinct structures or fields, each subscribing to a particular knowledge base, multiple logics can define the organisation’s processes and outputs when viewed holistically. Similarly, a company situated in ‘a field or at the interstices of multiple fields’ will probably have to incorporate each field’s dominant logic leading to increased centrality. An organisation may be drawing on different logics to define its identity but these can be easily aligned because there is concordance regarding goals, practices and objectives and conflict is limited (Meyer and Scott, 1983; Battilana and Dorado, 2010; Besharov and Smith, 2014, p. 13). 2.2: Logics applied to determine materiality It is possible to draw on the various logics identified in business management and organisational change literature (see, for example, Thornton and Ocasio, 1999; Besharov and Smith, 2014; Ocasio et al., 2015). As this study focuses specifically on corporate reporting, materiality is explained using the logics which have emerged in the technical accounting and sustainability reporting literature: a market, professional and stakeholder logic1. Materiality according to a market, professional and stakeholder logic ‘Materiality’ is defined as the relative importance of information to a user for decision-making purposes (Frishkoff, 1970) and, in an accounting setting, is often framed according to a market and professional logic. A market logic is concerned with the accumulation and maintenance of material financial wealth (Friedland and Alford, 1991) which is understood as the primary concern for providers of financial capital (Edgley, 2014). The logic is central to views on financial reporting which see accounting as a rational technical development designed to aid with efficient capital allocations and to mitigate agency costs (Watts and Zimmerman, 1983; Edgley, 2014). According to International Financial Reporting Standards (IFRS), materiality is entity-specific which could influence users’ decisions (IASB, 2010). Both qualitative and quantitative factors are considered when deciding whether information is material (IASB, 2010) but the assessment is framed according to the views of existing and potential investors, lenders and other creditors as the primary users of financial statements (IASB, 2010, p. A18). 1

Choosing pre-determined logics restricts the paper’s exploratory potential and is an inherent limitation. Nevertheless, examining other logics is beyond the scope of a single paper.

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A professional logic bridges the gap between government regulation and capital market expectations (Edgley et al., 2015). Like a market logic, financial considerations are relevant but there is also an element of professionalism in the sense that an accounting, auditing or finance expert, exercising due care, determines whether or not the decisions taken by providers of financial capital would be affected by the information included in financial statements (Power, 1997; Edgley et al., 2015). A professional logic is evident when an auditor is required to determine a threshold for evaluating misstatements and concluding on whether or not financial statements achieve fair presentation (IAASB, 2009b). International Standards on Auditing (ISA) state that ‘materiality is a matter of professional judgement’ (IAASB, 2009b, para 4). The emphasis is on serving the public interest by ensuring that important information has not been omitted from financial statements. Consequently, a thorough assessment of what is material based on quantitative and qualitative factors is required (IAASB, 2009a). A professional logic is characterised by adherence to codes of best practice, reporting guidelines and applicable regulatory requirements (see DiMaggio and Powell, 1983; Fogarty, 1992). In addition to coercive pressures driving the need for compliance, the objective is to link an organisation’s reporting practices with ‘external definitions of authority and competency’ (see Suchman, 1995, p. 589). While these require an organisation to take cognisance of ESG issues (see IIRC, 2013l; GRI, 2016; IOD, 2016), a professional logic often frames materiality in finance-centric terms consistent with a capitalist paradigm (see, for example, Tregidga et al., 2014; Edgley et al. 2014; 2015). For this reason, the market and professional logic may be part of a single institutionalised view of materiality as a financial construct, although the latter stresses the importance of adherence to codes of best practice and technical standards while the former focuses on maximisation of shareholder wealth. Finally, the growing awareness of the importance of ESG metrics for organisations’ longterm sustainability has given rise to what Edgley et al. (2015) refer to as a stakeholder logic and what Schneider (2015) describes as a sustainability logic. Both question the centrality of the shareholder at the heart of a market logic. Organisational legitimacy is not only the result of generating financial returns but also of demonstrating how a company is responding to societal concerns (Gray et al., 1995; O’Donovan, 2002). Value creation becomes a function of how multiple types of financial and non-financial capitals are managed to generate responsible returns for investors and positive outcomes for society (Eccles and Krzus, 2010; Atkins and Maroun, 2015; IOD, 2016). This does not mean that financial performance is

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unimportant but that economic objectives must be balanced with environmental and social considerations (Schneider, 2015).

Materiality determination guidelines for integrated or sustainability reporting The Global Reporting Initiative (GRI) and AccountAbility (2008) assist in determining whether non-financial information is material. The GRI (2016, p. 11) evaluates materiality according to an issue’s economic, environmental or social impact and its influence on stakeholders’ assessments and decisions. AccountAbility (2008) follows a similar approach which avoids a finance-centric conceptualisation of materiality. Instead, materiality is assessed qualitatively, taking into consideration an organisation’s context, sustainability drivers and the impact on and expectation of a broad group of stakeholders (AccountAbility, 2008; Edgley et al., 2015; GRI, 2016). The approach followed by the IIRC (2013) when explaining materiality in an integrated reporting environment is comparable. To be effective, an integrated report should only deal with material issues. According to the IIRC (2013, para 3.18), this involves: •

Identifying relevant matters based on their ability to affect value creation;

•

Evaluating the importance of relevant matters in terms of their known or potential effect on value creation;

•

Prioritising the matters based on their relative importance and

•

Determining the information to disclose about material matters.

The American Institute of Certified Public Accountants (AICPA, 2013) and the International Federation of Accountants (IFAC, 2015) iterate the above points. Senior managers and those charged with an organisation’s governance should oversee the materiality determination process paying attention to the actual or potential impact which facts or circumstances may have on an organisation’s strategy, business models or the capitals on which it is dependent or affects (see also IOD, 2016). Financial capital providers are identified as the primary users of integrated reports (see IIRC, 2013; ACIPA, 2013). This approach has been criticised (Flower, 2015; Dumay et al., 2017) but does not mean that integrated reporting ignores the needs of other stakeholders and the relevance of ESG matters. The IFAC (2015) specifically mentions the importance of a ‘multistakeholder’ (see also, IIRC, 2013). Read with the applicable codes on corporate governance, financial and non-financial matters must be taken into account from the Page 12 of 40

perspective of both shareholders and other user groups (De Villiers et al., 2014; IOD, 2016). The IIRC (2013) also recommends that qualitative and quantitative indicators should be considered when evaluating how an organisation creates value. ‘It is not the purpose of an integrated report to quantify or monetise the value of an organisation…’ (IIRC, 2013, para 1.11) and ‘an integrated report [should] benefit all stakeholders interested in an organisation’s ability to create value over time’ (ibid, para 1.8). Nevertheless, the predominant role of providers of financial capital (Flower, 2015), coupled with the underlying market pressures (Tregidga et al., 2014; Steenkamp, 2018), means that the interpretation of materiality and its application by preparers is likely to reflect the interaction of a stakeholder and market logic. A materiality framework drawing on institutional logics Figure 2 provides a framework defining materiality according to a market, professional and stakeholder logic, the corresponding normative positive and the implications for the materiality determination process. Figure 2: Materiality model2

A market logic emphasises the importance of efficiency and, as part of this, the maximisation of financial returns for investors. Grounded in the view that efficient markets result in the optimal allocation of resources, corporate reporting is concerned with reducing information 2

We are grateful to one of our anonymous reviewers for assisting with the development of this model.

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asymmetry (Jensen and Meckling, 1976) and allowing financial capital providers to gauge the amount, timing and certainty of future cash flows (Zhang and Andrew, 2014). ‘Usefulness’ is gauged in financial terms (IASB, 2010). Consequently, compliance with minimum disclosure requirements to avoid sanctions while balancing the marginal costs and benefits of any voluntarily reported information is essential (Watts and Zimmerman, 1983). The ultimate objective is to manage the divergence of interests between agents and principals in order to minimise agency-related costs. The same applies, by analogy, to sustainability or integrated reporting (Watts and Zimmerman, 1983). These types of reports can lower residual losses by providing details on an organisation’s strategy, business model and internal management practices (Churet and Eccles, 2014; Atkins and Maroun, 2015). Materiality is a function of whether or not additional disclosures can improve analysts’ forecast accuracy (see Zhou et al., 2017) and investment efficiency (see Barth et al., 2017) while avoiding providing generic or repetitive information which undermines readability (see du Toit, 2017). A professional logic focuses on demonstrating the highest levels of technical and professional practice (Edgley et al., 2015). It is difficult to determine if an integrated report provides a ‘true and fair view’ of an organisation’s activities and long-term sustainability. Users are also unable to observe the processes followed while compiling an integrated report (De Villiers et al., 2014; 2017). Consequently, ensuring compliance with existing reporting guidelines and codes of good governance is important for signalling that management is aware of minimum reporting requirements and is making a good-faith effort to prepare a high-quality report. Due to normative pressures at work in an increasingly institutionalised reporting environment (see DiMaggio and Powel, 1983), adherence to codified practices is also essential for the credibility of the materiality determination process (see Steenkamp, 2018). In this context, materiality is defined as whether or not specific disclosures are mandated or recommended by an external authority and, as such, can be accepted as relevant for users’ understanding of an organisation’s business model (see IIRC, 2013). When corporate reporting is framed according to a stakeholder logic, the objective is to give a holistic account of the value creation process. Reporting on the connections between multiple types of capital, strategy and operations improves transparency and accountability. High quality integrated reporting can also be reflexive, highlighting new areas for management review and control in order to drive improved performance along financial and non-financial lines and sustainable development (Guthrie et al., 2017; McNally and Maroun, 2018). A stakeholder logic does not preclude the need to reduce information asymmetry and Page 14 of 40

enhance financial returns but these are not primary objectives. Management must satisfy the legitimate information needs of a broad group of stakeholders on economic, environmental and social grounds (see Cummings, 2001). In this stakeholder-focused and multi-capital reporting environment, materiality determination becomes interpretive because the preparer needs to take various perspectives into account when deciding if information is relevant for the users of the integrated report. 3: Method The study is carried out in South Africa. Listed companies have been preparing integrated reports under local codes of corporate governance (King-III) since 20093; the jurisdiction offers a well-established reporting environment for investigating how companies are determining if information is material. To avoid the findings being limited to a single industry, companies from several sectors participated. They have different business models and varying social and environmental impact. As a result, the interpretation of integrated reporting and materiality presented in Section 4 is not just the result of a particular industry or business model characteristic. Finally, the researchers only engaged preparers. While different stakeholders can influence what information should be included in an integrated report, the materiality determination process is the responsibility of the preparer. Examining how stakeholders understand integrated report materiality is deferred for future research. 3.1: Data collection Twenty semi-structured interviews were completed with preparers at 14 organisations included in the top 40 JSE listed companies. The interviews were conducted from June 2015 to June 2016 and lasted between 45 to 90 minutes. All participants had at least 5 years’ experience at their respective organisations and at least 10 years of cumulative experience with integrated and sustainability reporting. Only respondents who are directly involved in a managerial role with the preparation of their companies’ integrated reports participated in the study. Refer to Table 1.

Table 1: Respondents Industry

Number of Period

3

Number of

The paper refers only to integrated reporting. A detailed evaluation of the differences between integrated and sustainability reporting is not within the scope of this research.

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Companies Financial services (FS) Consumer goods and services (GS) Entrainment/communications (EC) Mining/industrials (MI)

3 4 3 4

interviews January 2015 – June 2015 June 2015– November 2015 November 2015 June 2015 – June 2016

4 6 4 6

The sequence of questions varied but the researchers ensured that the same core issues were dealt with in all interviews. These include: (1) reasons for preparing an integrated report; (2) the role of existing reporting guidelines; (3) how preparers approach disclosures in their integrated reports; (4) preparers’ understanding of materiality and how this differs from financial reporting; (5) how they have adapted materiality to their businesses and (6) the impact of their stakeholders on the integrated report and materiality. The researchers dealt with organisations’ official position on integrated reporting as well as respondents’ views, including their position on what should be included in integrated reports and how this differed from current practices. Follow-up questions were asked within 2 weeks of completing each interview when necessary to clarify respondents’ views. 3.2: Data analysis and interpretation Each transcript and the related field notes were read several times and analysed to ensure identification of all the relevant details. Recurring themes, ideas or principles were identified and recorded in an open code register. The coding process was completed by the lead researcher and reviewed by the support researcher to ensure accuracy, completeness and consistency of the coding. Next, the open codes were linked to a market, professional and stakeholder logic. The researchers made notes on how respondents exhibited elements of these logics according to the model elements in Figure 2. These were compared to the literature on definitions of materiality, beliefs about the role and relevance of materiality and views on the importance of stakeholders’ information needs. This was a time-consuming and iterative process. The researchers also considered evidence pointing to respondents’ accepting, rejecting or blending the logics discussed in Section 2 and the rationales for identified practices4 (Thornton and Ocasio, 2008). Similarities or differences among respondents’ views were noted and a final data summary table was prepared. Data were organised according to the level of logic instantiation per 4

Other logics or combinations of logics may be at work. Consequently, the data were re-analysed four months after the coding was originally completed by the researchers and a research assistant working independently. No additional codes/themes were identified. This does not preclude the possibility of alternate logics being relevant but supports the argument in Section 4 that preparers’ understanding of materiality in a South African setting is influenced by centrality and compatibility of market, stakeholder and professional logics.

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Besharov and Smith (2014). Examples included the role of professional bodies in the reporting process (field-level), how mission statements and strategies guide reporting (organisation-level) and experiences and technical backgrounds of the preparers (individuallevel). This provided a basis for categorising the 14 organisations as ‘contested’, ‘estranged’, ‘aligned’ or dominated’ (Besharov and Smith, 2014) Grouping companies was subjective. As a practical expedient, companies were classified as having high or low compatibility and centrality5 based the extent to which multiple logics influenced their identity, strategy or mission (centrality) and evidence of inconsistencies in reporting objectives and practices (compatibility). The initial classifications were completed by the support researcher and re-examined by the lead writer to ensure consistency and accuracy. To corroborate conclusions, interview data were complemented by a content analysis of the companies’ integrated reports. The researchers focused on the sections of the integrated reports dealing with strategy, mission, risk identification and management, organisational overview, sustainability and materiality determination6. Disclosures were tagged as dealing with financial, environmental or social objectives and as qualitative or quantitative. Where the specific actions, performance measures and quantified outcomes were discussed, the disclosures were coded as substantive. Policy statements, high-level strategies, broad commitments and generic information were coded as symbolic (Cho et al., 2015). The researchers also tracked the volume of disclosure dealing with ESG matters, levels of repetition, and cross-references in different sections of the reports. How companies presented ESG issues (substantive or symbolic), the volume of disclosures dealing with each (emphasis) and extent of cross-referencing and hyperlinking (integration) provided a sense of the adherence to a market or stakeholder-orientated approach to reporting. Variations in disclosures dealing with ESG metrics were also used to confirm views on the internal consistency of reporting objectives and practices at each organisation. In turn, a summary of materiality determination disclosures for each company category was generated. 4: Results 4.1: Materiality under a dominant market-logic 5

Compatability and centrality may be a continuous measure but a high-low classification is typically applied given the inherent challenges of objectively measuring these characteristics (see Besharov and Smith, 2014) 6

Where separate environmental or sustainability reports were referenced in an integrated report, they were included in the data collection. Financial statements were not dealt with.

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At three organisations, responsibility for compiling integrated reports vests with chief financial officers who, as professional accountants, are socialised in economic discourses. They are usually supported by company secretaries who ‘carry out an important compliance and monitoring role’ and are tasked with ‘shareholder and other stakeholder engagement’ (R11). ESG specialists assist with preparing integrated reports but ‘the final decision on what to include is made by the CFO (R16) or the ‘accounting team’ (R14). There is no coordinated effort to collect data on performance and reflect on the interconnections between strategies, risks and different types of economic, environmental and social capitals. On the contrary, at three of the four organisations, external consultants are directed to draft reports which are submitted for approval by the respective accounting departments. This is justified because ‘the integrated report is not part of the real management’ (R11) of the company or is beyond managers’ area of expertise (R12; R14). The planning, coordination and authorisation of the integrated reports are firmly under the control of accounting/finance function (R11; R14; R16). Consequently, one professional group is controlling the reporting space. Even if a second logic influences some preparers, potential conflict is avoided by deferring to objectives set by the CFOs and compatibility is high. Conversely, centrality is low. The four organisations identified operating efficiencies cost control and market penetration as the main features of their business strategy (R13). Preparers acknowledged that environmental and social factors are ‘potentially relevant for some stakeholders’ (R14; R16). Nevertheless, these are not dealt with explicitly as part of the strategy, risk management or business model sections of their integrated reports (see also Van Zijl et al., 2017). The emphasis is on providing decision useful information to capital market participants: I think materiality is more a financial driven thing. I guess if it’s number of litres of water, for example, for assurance for integrated reporting, then it’s important but I think things like that will also pull through into your financial reporting as well. (R12)

There are doubts about the value-relevance of disclosures on social and environmental capitals (cf Zhou et al., 2017). Reporting is a ‘costly’ (R13), ‘time-consuming’ (R12) or ‘compliance exercise’ (R16) which is driven by underlying coercive and normative pressures:

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Do we have a choice? The real reason why we prepare an integrated report is because we have to… It is quite difficult to prepare an integrated report … That is why we prepare the integrated report; it is more of a must. (R16)

Although integrated reporting is not a statutory requirement in South Africa, it is recommended by codes of best practice and a defining feature of the local market (R14; R16). Conforming to recommended practices outlined by the IIRC, the GRI and South Africa’s codes on corporate governance aligns an organisation with institutionalised standards and becomes an important source of legitimacy (see DiMaggio and Powell, 1983; Suchman, 1995). Consequently, ‘to meet expectations, you must prepare an integrated report’ and ‘cannot just ignore [environmental and social issues] by saying that they are not material’ (R16). ESG-related information ‘probably has some relevance to [non-shareholders]’ (R12). A stakeholder logic is not, however, instantiated as an integral part of the business ethos. The default position is that the information needs of other stakeholders are satisfied by meeting shareholders’ requirements (R12; R14; R16). Inconsistencies between market imperatives and ESG concerns are resolved by ensuring that ‘elements of structure are decoupled from activities and each other’ (Meyer and Rowan, 1977, p. 357). For example, organisational goals are stated in financial terms. Objectives relating to ESG issues are dealt with indirectly as part of the reputational and profitability impact: …everyone thinks if they just report on the numbers and meet their KPIs on the financial side then we’re a great business. You can see that businesses are starting to think reputation because if we have a negative reputation then you don’t meet your financial targets. (R14, emphasis added) Alternatively, social and environmental challenges are re-framed as economic ones to ensure that any actions are consistent with the ultimate goal of maximising shareholders’ returns (see also Tregidga et al., 2014; Cho et al., 2015): We don’t ignore the environmental stuff, but you have to remember that this is a business. We have to manage the soft issues but keep things in perspective. We cannot tell investors that we did not generate returns but look at all of these other amazing things we did. (R11)

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Coercive and normative pressures mean that a stakeholder logic is not rendered irrelevant, but there is a sense that engaging with stakeholders and providing details on ESG performance indicators is more symbolic than substantive: When we did look at ESG type of things…it was more for expectation and keeping up with what the standards require and what some stakeholder will probably want to see (R11) Integrated reporting has more to do with impression management than commitment to sustainable development (Haji and Anifowose, 2016): We want to use the integrated reporting to provide information to stakeholders, but we also realise that it’s a way for us to get our message out and tell people about the good work we have been doing…We are not misleading people. We cover both sides of the story, but good news does take centre stage (R16).

Replicating the disclosure practices of perceived integrated reporting leaders is an integral part of disseminating ‘good news’ and amplifying an organisation’s credibility (De Villiers and Alexander, 2014): We check the integrated awards to see…who are in the top ten? We want to be in the top ten and that is the aim for this year. We discuss areas of improvement by looking at what people did last year, those who won. (R16) Codes of best practice become ‘disclosure checklists’ (R14) rather than frameworks for informing changes to business processes. Compliance with the King Codes, the GRI and IIRC is used to signal that an integrated report provides a ‘true and fair view’ and substitutes for substantive actions taken to ensure sustainability performance. As part of this process, select ESG disclosures are independently verified: [Assurance] gives evidence of good integrated reporting but, in all actuality, the assurance does not tell you if the company is sustainable or if the report provides a complete view of what is really going on (R11)

Importantly, decoupling is not used deliberately to mislead report users; a strong professional logic stresses the importance of accurate reporting and avoiding legal liability because of fraudulent disclosures (R11). Demonstrating compliance with technical provisions (R12); confirming that ‘minimum standards’ are met (R16) or ‘proving’ a Page 20 of 40

reasonable effort to compile an integrated report (R14) are also defining features of a professional logic (Edgley, 2014; 2015). Normative pressures to apply codes of best practice result in these being interpreted as authoritative (R12; R16). A sense of fiduciary duty takes hold which amplifies the drive to include reporting guidelines’ recommendations or disclosures included in competitors’ reports. Nevertheless, organisations guided by market imperatives see the social and environmental agenda as competing with shareholders’ interests. Framed in this way, decoupling is mobilised as a response to a perceived hegemonic challenge and a means of maintaining the primacy of financial capital providers (see Tregidga et al., 2014). In doing so, organisations can lower centrality by resolving tensions between market and stakeholder logics in favour of maximising shareholder wealth. With a single business objective established, compatibility is increased by avoiding policies, plans and actions which would otherwise ‘distract’ (R12) the company form achieving its main purpose. Where a market logic firmly in place, materiality determination is linked to economic performance and providing financially relevant information to shareholders: In our strategy, we said that ROE is the be-all and end-all of our performance. If we can grow ROE, then we’ve got a long-term approach (R12). Any other information is material if it can be quantified and has a direct (or easy-tounderstand) financial link which can influence investment or lending decisions: I think materiality is more a finance-driven thing. I guess if it’s the number of litres of water, for example…then it’s important but I think things like that will also need pull through into your financial reporting. (R12, emphasis added).

A stakeholder logic reinforces the assumptions of a market or economics-based ethos. Similarly, a professional logic does not result in questions about the appropriateness of a financial emphasis on the balance and completeness of the materiality determination process (cf AccountAbility, 2008). Preparers rely on ‘bright lines’ (R16) or ‘generally accepted rules of thumb’ (R14) to compute materiality (Edgley et al, 2015). A compliance focus means that any information referred to by reporting frameworks has to be addressed in an integrated report, even if it would not otherwise have been reported (R12; R16). The result is that materiality is understood in binary terms: ‘It’s either material or it’s not… If it's not material, it's not an issue’ (R12).

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4.2: Materiality in an estranged reporting environment At the two ‘estranged’ organisations, the factors resulting in low centrality are the same as those at market-dominated firms. Compatibility is low because there is no centralised reporting function. The CFOs focus on financial statements. ‘Other parts of the report’ are delegated to ESG specialists (R8). Inter-group interaction is limited: “Each team takes responsibility for their part of the report. They know what they need to do and how they want their section to look. In the end, the parts are pasted together and the [company secretary] does the job of making sure that people don’t contradict each other’. (R8). The integrated report becomes a ‘jigsaw of different pieces’ (R6) rather than a carefully planned and coordinated account of the organisation’s performance. Conflict between preparers aligned with a market and stakeholder logic concerning their relative contribution to the ‘reporting puzzle’ are common (Besharov and Smith, 2014). ESG teams frequently criticise the finance function for taking an overly-simplistic approach to reporting. Their assumption that stakeholders’ information needs can be addressed by servicing shareholders’ requirements is contested (see Flower, 2015; Thomson, 2015). Stakeholder-informed preparers want to use a mix of qualitative and quantitative information to explain sustainability performance and insist that the respective disclosures should be presented prominently in the integrated reports (R7; R8). For individuals subscribing to a market logic, ESG narratives are ‘fluffy’. Unless the information can be monetised and incorporated in financial statements, it is best excluded from the integrated reports (R7; R8). A completely disorganised approach to reporting is, however, avoided. Low centrality dampens the effects of inconsistent objectives and practices between ESG and finance teams by ensuring that the integrated report is, ultimately, aimed at shareholders. This is especially true given that uncertainty about other stakeholders’ interest in integrated reporting lowers coercive and normative pressures for multi-capital reporting. Preparers adhering to a market logic feel that the shareholder is at the centre of corporate reporting (R7, R8). Isomorphic forces may have some relevance, but there are no direct legal consequences for poor reporting (R7). Similarly, in response to the argument that integrated reporting may be value-relevant (see Barth et al., 2017; Zhou et al., 2017): Our experience in the past has indicated that few of the investors have read [the non-financial sections of the IR] …I've never had any indication of [other stakeholders] having even read the integrated report…(R7)

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Those who are stakeholder-aligned are less sceptical but relied entirely on codes of best practice to define generic user groups (R6). Formal processes are not in place for engaging with stakeholders because compliance with reporting guidelines is enough to demonstrate that the firm is aligned with generally-accepted practice (R6). When constituents do not approach the firm, ESG specialists see this as evidence of the adequacy of their parts of the integrated reports (R6, R15). Members of the accounting and finance department conclude that other stakeholders are either disinterested or do not exist (R7; R8). With low compatibility, divergent views on the structure and content of the report are unresolved and both organisations default to referring to what codes of best practice recommend for inclusion in an integrated report. They concede that, ‘because it’s still a work in progress, we don’t go into detail on our materiality determination in the integrated report’ (R6) (see also Beske et al., 2019) 4.3: Materiality in a contested environment Like estranged firms, five organisations relied on separate teams to prepare different report sections (R3; R4; R9; R10). Each asserts its views on the report content and structure with variations in commitment to market, stakeholder and professional logics resulting in low compatibility and more frequent conflict (see Besharov and Smith, 2014). For example, finance teams disagree with human resource practitioners and environmental specialists on the relevance of environmental and social capitals for their firms’ business models. This affects views on the ideal amount and prominence of disclosure dealing with each capital (R15; R19). The number and identity of different types of stakeholders is debated (R3; R9; R10). There is no consensus on the importance of assurance providers (R3; R4; R9; R10). Arguments on the type of data collected and how it should be analysed are common. Those subscribing to a market logic prefer quantitative data which can be objectively and consistently measured. Ideally, information should be monetary (R19). Proponents of a stakeholder-centric reporting model prefer a mix of qualitative and quantitative information and feel that narratives, case studies and pictures provide important context. High centrality means that disagreements at the practice-level go hand-in-hand with multiple logics informing firm structure and identity (Besharov and Smith, 2014). Strategies and mission statements are grounded in a market logic, but the preparers accept that conventional reporting has limitations and that non-shareholders have legitimate information needs (R3; R4). Consequently, financial statements must be complemented with detail on ESG performance to provide a complete account of the organisation (R3; R4; R9; R10).

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A professional logic is at work which emphasises the importance of integrated reports providing ‘a true and fair view’ and a sense of accountability to report users. For professional accountants, reliable reporting is necessary for avoiding economic indicators being interpreted out of context by shareholders (R15). ESG specialists must manage the risk of stakeholders receiving an ‘incomplete story’ (R9; R10). Senior executives have ultimate responsibility for publishing their organisation’s integrated reports, notwithstanding the challenges stemming from high centrality and low compatibility. This is achieved by viewing the business as a political entity which must simultaneously address conflicting stakeholder and preparers’ demands rather than a unified structure which subscribes to a single logic to secure legitimacy (see Lipson, 2007; Cho et al., 2015). For example, to placate shareholders the emphasis is on maximising financial returns. Disclosures are entity-specific, deal with actions taken to achieve objectives and supported by quantified measures of performance. In contrast, normative views on ESG responsibility are addressed in less technical detail and without a clear link between policy and actions. When it comes to other stakeholders, the reporting is inverted. Case studies and management commentary avoid the criticism that ESG issues are being monetised or interpreted too narrowly. Contemporaneously, ESG specialist reviews add technical content and ‘map’ specific concerns with operational activities (R3; R4). To maintain the confidence of capital market providers, some environmental and social initiatives may need to be acknowledged while plans for any remedial action are deferred. This allows the organisation to present itself as mindful of one group of stakeholder’s concerns while avoiding any immediate commitments which may alarm other influential constituents. So there will be engagement on these issues if they present a challenge and they are preventing progress in terms of the strategy but if you doing well they [the primary stakeholders] are happy not to know about it and we don’t [go onto detail] (R3) By counter-coupling talk and action, tensions between a market and stakeholder logic driving inconsistent organisational practice are managed. Varying the emphasis of information targeted at financial capital providers and other report users allows the organisation to claim that its integrated reports are broadly aligned with codes of best practice in keeping with a professional logic. The codes provide an objective basis for justifying the decision to include specific information in an integrated report (R3; R4; R19). Materiality is informed by financial implications. ESG issues are not automatically irrelevant but they must be assessed according to their effect on current and future profitability. For example: Page 24 of 40

For these [environmental risks]…it is In relation to or in comparison with financial [information]…and is being defined in quantitative terms…it's material given the size of the company; if there's a difference of 5% in profit or revenue in terms of impact of an issue, that's material (R4)

When a stakeholder logic holds sway, financial impact is relevant for determining materiality but is not the only consideration. Preparers must take cognisance of different stakeholder perspectives (R3). Materiality becomes a function of independent assessments being carried out by the finance and ESG reporting teams. For example, a specific environmental disclosure may be excluded by a preparer from one part of the integrated report because the direct or indirect financial implications are limited. When re-evaluated according to its relevance for another stakeholder, the same issue could be important for providing context and explaining how environmental issues are being managed. It is, therefore, included in an alternate section of the report. The IIRC, GRI and King-IV are a final check. Generally, recommended disclosures are deemed material and included automatically in at least one part of the integrated reports. 4.4: Materiality in an aligned environment At four ‘aligned organisations’, financial performance is important but ESG factors are not overlooked because they have an indirect effect on financial capital and are relevant business considerations. If you look at the [integrated report]… we have our group performance score cards. These deal with the economics and the numbers….but we cover all of the key issues. Six out of the top ten issues are effectively issues that impact non-financial stakeholders. (R5). The company understands its dependence on financial capital providers but, even with access to debt and equity participants, it cannot operate sustainably if access to environmental and social capitals is limited. The organisation is dependent on different constituents with varying influence and demands. A type of ‘fragmented centralisation’ results which pressurises the business to conform to the underlying market and stakeholder logics yielding higher centrality than in market-dominated firms. Preparing an integrated report in a pluralistic environment requires a multidisciplinary team. Accountants work with specialists in areas such as biodiversity, human resources and intellectual capital. Finance departments are consulted regularly but individuals responsible for managing different parts of the organisation’s operations are also engaged. Examples Page 25 of 40

included stakeholder relations, human resource leaders, trade unions and environmental officers. Consultants are appointed as reviews not as substitutes for in-house ESG specialists. Team members from the finance and ESG functions hold senior positions (R1; R5; R18). This allows individual preparers to gain access to multiple parts of an organisation and direct the information necessary for compiling a report to address stakeholders’ information needs. Unlike market-dominant firms, CFOs only assist with preparing integrated reports; they focus on financial statements. The boards of directors, in consultation with audit and risk committees, approve the integrated reports. A dynamic reporting environment results because individuals have different technical skills and are not defaulting automatically to a financial or economic framing of the business and its objectives. Compatibility is, however, high. Core operations and practices are infused by a professional logic which stresses a fiduciary duty to provide stakeholders with valid information. This can involve direct interaction with external users (R2; R5), panel discussions with firm members (R20) and tracking company website downloads (R17). For dominant and contested organisations, a professional logic necessitates strict application of codes of best practice (R3; R4; R9; R10; R19). At aligned organisations, preparers are inclined to develop their approach to reporting as this explains the organisation’s context more comprehensively and is, therefore, more useful for stakeholders. For example: We do believe that we are not G4 compliant… We aren't even sure if we want to be G4 compliant: we are using it as a guideline and a framework but we do believe that we report on way too many things which aren't material to the group. They have no impact on the group. We have the information, but we don’t necessarily need to share it. (R2) With no professional group in a dominant position, reporting on transformations of financial capital is necessary but that this needs to be explained in the context of the firm’s business model, risks and other essential capitals (R1; R2; R20). ESG issues are not in opposition to financial imperatives or vice versa but evaluated holistically. This means that decoupling or counter-coupling is not required. A multi-capital approach to reporting results in a type of feedback loop which highlights weaknesses in strategies, management systems and operations and, in turn, contributes to substantive change:

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…we've done a heat map in terms of what are the areas we've determined to be very high risk for us in terms of probability, the likelihood of [the event] and impact…we can then have a look at our risk management reports and compare it to our audit risks or the risk committee reports… (R2). Once the risk areas are identified, the company proceeds to measure the risk, implement mitigation plans, track performance and improve efficiencies. New systems have been established to collect data and identify if issues impact the business significantly (R17; R18). Information included in an integrated report has also heightened awareness about the importance of so-called ‘non-financial information’ for informing changes to an organisation’s business strategy and management processes (R1; R2; R17). For example, R5 explained how water usage reporting informed the development of performance indicators and waste reduction techniques. Similarly, monitoring and reporting on employee health promotes skill retention, better work-place relations and improved productivity (R2). Unlike marketdominant organisations, integrated reporting is not being driven only by normative and coercive pressures; it promotes positive change for the benefit of both shareholding and non-shareholding constituents (see Guthrie et al., 2017; Al-Htaybat and von AlbertiAlhtaybat, 2018; McNally and Maroun, 2018). For aligned organisations, materiality is determined interpretively. For example, one company collects data from multiple sources such as stakeholder feedback, social media, industry-specific information and reporting frameworks. The data are analysed for common themes which are ranked according to the emphasis placed on each and the reporting team’s judgement: We took all of that information and that is when the process started and we then rated it. I think we then used the rating system where we managed to get 21 material issues. So we continue to refine materiality and it's the most important things, the things that will make sure that we stay in business, basically. (R1). The company did not use a statistical method for analysing the data; identified themes are discussed in detail until the team is satisfied with the primary issues: It was a very easy process. Of the many issues we got from the stakeholders, we could easily group them into the four categories. We didn't have them before the time but, as we started grouping them together, we realised that there were four themes coming through and that's how we built them. (R1).

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Preparers stated that the material points remain constant over the short-term but the emphasis on each varies each year according to context (R1; R18). Triangulation is used to confirm the reasonability of the materiality assessment (see also Maroun, 2017; 2018). This involves comparing identified material focus areas with risk registers, board discussions and stakeholder feedback: …we meet about 10 external stakeholders in all of our regions and ask them to tell us what they think is important… We have a risk table here with our top 10 risks… we had outside stakeholders and we asked them to rate what they consider important and we give them the criteria. Then we ask them to rate…what [they] consider to be important. Then we add them up, divide them and we arrive at a very simple equation. (R5).

When centrality is high, market, professional and stakeholder logics inform an organisation’s identity but high compatibility means that otherwise competing objectives, policies and actions can be reconciled (Besharov and Smith, 2014). As a result, financial and ESG indicators are not classified as ‘financial’ or ‘non-financial’; they are mutually complementary and equally relevant. Whether or not they are material depends on the impact on an organisation and their relevance for stakeholders’ assessment of a firm’s long-term sustainability. Drawing on a professional logic, preparers explained how they must analyse and report on different types of information to provide a comprehensive account of the business model and strategy; address stakeholders’ expectations and maintain their firms’ reputation in the eyes of important constituents (R1; R2; R5; R17; R18). 5: Summary, discussion and areas for future research For firms with a dominant market logic, the institutional field is controlled by an economics and finance discourse with limited contribution from ESG specialists. Information is classified as either financial or non-financial. External consultants are tasked with preparing those parts of the integrated reports which deal with the latter because these are not central to the organisations’ business model. Missions and strategies are infused with market imperatives and dependence on financial capital. In this context, centrality is low and compatibility is high (Panel A, Table 2). When it comes to reporting, individual preparers draw mainly on finance expertise. ESG considerations are marginalised (Panel B Table 2). Coercive and normative pressures mean that integrated reports include, at least, some ‘non-financial’ disclosures but there is little indication of how business models, risk management, strategy and ESG metrics are interPage 28 of 40

connected (see Schneider, 2015; Van Zijl et al., 2017). Most disclosures address financial and manufactured capitals and ESG indicators are decoupled from the organisation’s ‘economic core’. This involves providing generic information and avoiding detailed reporting which would link economic, environmental and social performance explicitly. To pre-empt scrutiny, positive accounts are emphasised while adverse ESG performance is obfuscated. This implies that integrated reporting is more ceremonial than an indication of sustainable development. With most of the emphasis on capital market participants, materiality is defined only with reference to financial performance. Internal sources inform materiality thresholds. The determination process, relevant factors and revisions to materiality levels are either generic or omitted from the reports (Table 2, Part C). Like dominant firms, estranged companies have low centrality characterised by strong adherence to a market logic. Their reporting structures are, however, ‘fragmented’ resulting in low compatibility among preparers. They have the lowest number of disclosures of the organisations under review. Reports deal primarily with financial capital and there are few cross-references to show the interconnection among economic, environmental and social disclosures (Table 2, Part B). The reports explain that only material information has been included but how materiality is defined and operationalised is not discussed (Table 2, Part C). If compatibility remains low but centrality increases, the reporting space becomes contested. Strategies, mission and value statements are informed by an economic agenda, but ESG issues are also relevant because they can affect a firm’s financial returns. A stakeholder logic

also results in the acknowledgement of the legitimate information needs of non-

shareholding constituents. Addressing divergent stakeholder expectations falls to groups of preparers drawing on either economic or ESG specialities and reaching different conclusions on what to include in an integrated report. Reconciling these differences can be difficult due to high centrality. Consequently, an organisation can construct several accounts of itself which are compiled by the most appropriate preparer group and targeted at the relevant stakeholder. For example, financial disclosures are action-specific and complemented by a review of actual versus budgeted performance. They are counter-coupled from ESG indicators which are discussed at the policy-level. Management acknowledges the need to address key social and environmental risks, but the inherent complexities are not outlined and specific interventions are deferred (see EC3 and GS1). Alternatively, shareholders’ needs are addressed by discussing economic indicators in integrated reports, including financial risks Page 29 of 40

arising from the firm’s ESG context. Detailed explanations of inherent challenges, opportunities, policy development and action plans (which are not finance-specific) are included in a hyper-linked complimentary report (see M1). The exact approach used to counter-couple ESG and economic information varies but consistently results in the longest integrated reports. To accommodate both a market and stakeholder logic, materiality is context-specific. Factors which are relevant for finance teams are consolidated with those resonating with ESG specialists. Due to the inherent complexity of their reports, contested organisations are inclined to list the financial and ESG indicators informing materiality determination.

They use codes of best practice to support their

conclusions. Given low levels of compatibility, they stop short of explaining how materiality links with their strategy and long-term value creation.

Details on how materiality is

determined are limited to avoid amplifying tensions among competing logics. For aligned firms, higher compatibility means that integrated reports are designed to meet stakeholders’ legitimate information needs and for informing changes to business practice. Consequently, there are more disclosures on the different capitals than is the case with other firms. Financial performance is a key concern, but the emphasis placed on accounting measures is decreased. There is a better mix of qualitative and quantitative information on ESG metrics which are included explicitly in the strategy, mission, risk management and business model sections of the reports. A single multi-disciplinary team prepares integrated reports. Differences between a stakeholder and market logic can result in diverging views among organisations on the relevance of ESG factors and the extent to which financial performance should be emphasised. While the volume of disclosures dealing with ESG issues is high for aligned firms, some information is repetitive or generic. The materiality assessment refers to strategy, risk and long-term value creation. Economic, environmental and social dimensions of performance are likely to be treated as equally relevant (Schneider, 2015). Materiality must be gauged for each ‘element’, cognisant of the fact that different stakeholders may be the primary users of different parts of an integrated report. Formal materiality assessment processes, using multiple sources of information, are used to define materiality. This includes economic, environmental and social factors which are also considered as part of a long-term assessment of value generation.

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Key findings are summarised in Table 2. To complement the detailed interviews, integrated reports were reviewed to gain a sense of how the scope of reporting, focus placed on stakeholder engagement and materiality determination vary7.

7

A comprehensive integrated report quality score is not developed and evaluated in a positivist sense. The researchers focus broadly on how materiality is defined and explained in respective integrated reports. The analysis addresses the inherent risk of rehearsed responses.

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Table 2: Logic characteristics and disclosure matrix8 Dominated GS2

Estranged

MI4 FS2

FS1

EC2

Contested

Aligned

GS1 GS3 MI1 EC3 GS4

EC1 FS3 MI2 MI3

A: Factors affecting centrality and compatibility •

Limited

number

of

professional

institutions represented •

Domination

by

a

a

a

a

a

a

a

a

a

a

a

a

•

Few internal ESG specialists

a

a

a

a

a

•

Increased dependence on consultants

a

a

a

a

a

•

Finance-centric mission and strategy

a

a

a

a

a

•

High financial capital dependence

a

a

a

a

a

•

Reliance

a

a

a

a

a

a

Limited

interaction

among

a

a a

a a

a

a

a

a

a

a

a a

a

CFOs/company

a

a

a

reporting

functions •

a

accounting/finance/legal

expertise •

a

accounting/finance

profession

on

a

secretaries

authority over reporting processes

a

a

a

a

a

a

have a

a

a

a

a

a

B: Reporting characteristics

8

Given the long history of different types of non-financial reporting in South Africa, the results are not affected by earlier experiences with preparing sustainability reports. A more extensive longitudinal analysis is deferred for future research.

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Table 2: Logic characteristics and disclosure matrix8 Dominated GS2 •

Report

emphasises

financial

MI4 FS2

FS1

EC2

a

a

Contested

Aligned

GS1 GS3 MI1 EC3 GS4

EC1 FS3 MI2 MI3

and a

manufactured capitals •

Estranged

a

a

a

ESG metrics are an integral part of the firms' strategy, risk management and

a

a

a

a

a

a

a

operational dynamics. •

ESG disclosures are cross-referenced and hyperlinked to other sections/sub-

a

a

a

sections and additional information. •

ESG disclosures generic/repetitive

•

ESG

disclosures

performance;

deal

negative

with

a

a

a

a

a

a

a

a

a

a

a

a

a

positive

accounts

are

a

a

a

minimised •

ESG disclosures are at a policy level/deal with desired outcomes or managements’

a

a

a

a

a

a

expectations •

Policy statements and action-focused ESG disclosures are prospective.

•

Complementary

reports

a

a

a

a

a

a

a

a

provide

additional detail on actions, performance

a

a

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Table 2: Logic characteristics and disclosure matrix8 Dominated GS2

Estranged

MI4 FS2

FS1

EC2

a

a

Contested

Aligned

GS1 GS3 MI1 EC3 GS4

EC1 FS3 MI2 MI3

against targets and planned initiatives relating to ESG issues C: How materiality is disclosed Process followed to set materiality •

Based on internal sources only

•

Based on multiple sources

•

Materiality

determination

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

a

process a

formalised •

a

Details provided on factors affecting a

materiality and any revisions

a

Definition characteristics: •

Based on financial performance

•

Takes social and environmental issues

a

a

a

a

a

a

a

a

into account

a a

a

a

a

a

a

a

a

a

a

a

a

a

Reference to stakeholders

a

a

a

•

As per code of best practice

a

a

a

•

References to long-term value creation

a

•

Linked to firm's strategy and risks

a

Page 34 of 40

a

a

a

a

•

a

a

a

a a

a a

a a

a

a

The above findings have several implications. First, integrated reporting is inherent subjectivity and still evolving. No single logic consistently takes hold. The interactions among market, professional and stakeholder logics explain variations in reporting practices. These can be represented as a continuum from a purely compliance/ financial-orientated to an interpretive/sustainability-driven approach to integrated reporting. Secondly, this study touches on the interconnection between logic multiplicity and organisational change. A dominant market logic may make it difficult for organisations to internalise and respond to alternate perspectives. Consequently, the emergence of the sustainable development movement is not resulting in the significant change required to reverse the adverse effects of business on society and the environment (see Brown and Dillard, 2014; Stubbs and Higgins, 2014). Conversely, where institutional-, organisationaland individual-level factors contribute to an alignment of market, stakeholder and professional logics, the potential for positive change is increased. While integrated reporting has limitations (Thomson, 2015; Humphrey et al., 2017), it may prove useful for championing a more sustainable way of doing business (Al-Htaybat and von Alberti-Alhtaybat, 2018) Finally, the operationalisation of logics should inform improvements to integrated reporting. For example, professional guidelines can include details on performing a thorough analysis of stakeholders’ needs and materiality assessments. Possible points include the methods for analysing different views on what constitutes material information and how corporate governance systems can be used to ensure the reliability of this part of the reporting process. Definitions of materiality can also be revised based on this paper’s findings. More broadly, regulators and standard-setters will need to realise that high-quality reporting cannot be achieved only by issuing prescriptions. The benefits of integrated reporting need to be made clear. Academics also have an important role to play. Future research is needed on how to report on multiple types of capital to improve stakeholders’ understanding of organisations’ business models. This paper only provides preliminary views on how stakeholder engagement can be used to enhance reporting. Stakeholders have not been interviewed and variations in stakeholders’ interests are not considered. Similarly, precisely how companies prioritise their stakeholders and categorise information to address their expectations is not addressed. Future researchers can consider how logic boundaries change, the reasons for those changes and the implications for reporting practices. This paper classifies 14 companies on a 2x2 matrix over a limited period. How logics become dominant or align with others is not examined. The stability of logic interinterrelationships; the factors resulting in realignment of or conflict between logics and why

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organisations may change from being logic-dominated to estranged, contested or aligned is deferred for future research. The researchers acknowledge that the results are based on a relatively small group of companies and preparers from a single jurisdiction. The proposed interaction between logics and the implications for materiality determination needs to be tested with a larger sample of respondents considering differences in countries’ corporate governance systems and reporting requirements. Although this research found evidence of a market, stakeholder and professional logic at work, the possibility of other logics being instantiated in different contexts could also prove an interesting avenue for future researchers.

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