Saying more with less? Disclosure conciseness, completeness and balance in Integrated Reports

Abstract

The Integrated Reporting Framework of 2013 represents the latest international attempt to connect a firm’s financial and sustainability (i.e., environmental, social and governance) performance in one company report. An Integrated Report (IR) should communicate “concisely” about how a firm’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of sustainable value. At the same time, an IR needs to be “complete and balanced”, i.e., broadly including all material matters, both positive and negative, in a balanced way. Drawing on impression management studies, we examine a selection of performance determinants to gain insights into the factors associated with conciseness, completeness and balance in IR. The results from a sample of IR early adopters show that in the presence of a firm’s weak financial performance, the IR tends to be significantly longer and less readable (i.e., less concise), and more optimistic (i.e., less balanced). We additionally find that firms with worse social performance provide reports that are foggier (i.e., less concise) and with less information on their sustainability performance (i.e., less complete). Our evidence implies that IR early adopters employ quantity and syntactical reading ease manipulation as well as thematic content and verbal tone manipulation as impression management strategies. The results also suggest that such strategies depend not only on the level of firms’ performance but also on the type of performance (financial versus nonfinancial/sustainability). This paper adds to the limited literature on IR in sustainability accounting as well as to the research in mainstream financial accounting that examines disclosure quality using textual analysis

The readability of integrated reports

“…Apart from symbolic legitimacy, companies use the information in published reports to manage public impressions (Adams, Larrinaga-González, Adams, & McNicholas, 2007;Brennan et al, 2009;Chatterjee, 2008;Chen et al, 2016;Hooghiemstra, 2000;Magnaghi & Aprile, 2014;Maroun, 2015;Melloni, Caglio, & Perego, 2017;Stanton, Stanton, & Pires, 2004;Sydserff & Weetman, 1999). Even though impression management theory was initially coined to explain the behaviour of an individual, the theory has been extended to organisations to explain the actions of organisations in terms of legitimacy theory (Hooghiemstra, 2000;Neu, Warsame, & Pedwell, 1998).…”

“…Magnaghi and Aprile (2014) also found a majority of positive disclosures in the reports they evaluated. There are various approaches to impression management in corporate reporting, with the majority of these focussed on ways to hide negative information and promote positive information (Brennan et al, 2009;Maas, Schaltegger, & Crutzen, 2016;Melloni et al, 2017;Stacchezzini, Melloni, & Lai, 2016).…”

Executive Remuneration: Achieving Accountability through Disclosure

“…Shareholders require a sufficient level and quality of information content in communications from management to enable them to make decisions about the suitability of the manager's actions, and the management's compliance with the remuneration contract (Healy & Palepu, 2001). Disclosure is a means by which managers can communicate and justify their actions to shareholders, however the manager can vary the quality of these disclosures (Kothari, Li & Short, 2009;Melloni, Caglio & Perego, 2017;Zechman, 2010).…”

“…These firms may be inclined to have more disclosure, or provide shareholders with better quality disclosure. It appears firms will trade off the cost of disclosure against the perceived benefits of reduced information asymmetry for their circumstances (Beatty, Berger & Magliolo, 1995;Melloni et al, 2017).…”

“…The longest remuneration report throughout the duration of the study was in 2010, which was 55 pages produced by MQG, and the shortest was 2 pages published by Cabcharge in 2010. Prior research finds that increasing amounts of disclosure does not necessarily result in an increase in quality of disclosure (Plumlee, 2016), and recent research suggests that in some areas of disclosure, firms with poor governance and poor performance will adopt a strategy of producing less concise disclosures in an attempt to conceal their poor performance (Melloni et al, 2017). The PC Inquiry report suggested that in the case of Australian listed firms, the increasing length of remuneration reports may not be an attempt to obscure poor performance, but was a reflection of the complexity of executive remuneration contracts (PC, 2010:247).…”