GRI Conference - 27 May - Perrini - Sustainability Reporting Panel
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  • 1. GRI Conference 2010 Sustainability Reporting Panel Amsterdam, May 2010 Making the Most of CSR Reporting: Disclosure Structure and its Impact on Performance Francesco Perrini Bocconi University With Clodia Vurro, Bocconi University F. Perrini, C. Vurro 1
  • 2. Agenda Premise and objective of the study Theoretical background Hypotheses Sample & methodology Results Discussion Contribution and suggestions F. Perrini, C. Vurro 2
  • 3. Premise and objective of the study Private sector is increasingly moving away from financial measures as all-inclusive indicators of corporate performance all- Nonfinancial disclosure and reporting are gathering momentum: Informing internal decisions and supporting companies in identifying strengths and weaknesses across the whole corporate responsibility spectrum Setting the basis for firm-stakeholder dialogue and attracting those firm- stakeholders who favor socially responsible business and have the power to reward it Is nonfinancial disclosure conducive to a better ability to manage firms’ social context of reference? Adopting a stakeholder-based framework, we propose and test a model stakeholder- framework, relating the structure of nonfinancial reporting to corporate social performance F. Perrini, C. Vurro 3
  • 4. Theoretical background Existing theoretical literature justifies the performance consequences of nonfinancial disclosure referring to the following theoretical perspectives: Cost- Cost-benefit analysis of disclosing proprietary information: information: Ad hoc reports as signals of superior performance aimed at avoiding potential adverse selection risks and the exposure to future social costs (Verrecchia, 1983; Dye, 1985) (Verrecchia, Socio- Socio-political pressures to disclose: disclose: Nonfinancial disclosure allows firms to control for potential legitimacy threats, by means of its favorable impact on stakeholder perceptions (Abbott & Monsen, 1979; Patten, 2002) Monsen, Adaptive managerial styles: styles: Nonfinancial reporting is a tool to improve managerial awareness of and control over the social impact of corporate activities (Bowman & Hire, 1975; Preston, 1981) Yet, empirical analysis has focused on: Content of nonfinancial disclosure: disclosure: Determine the amount and type of social and environmental information companies provide (e.g., Deegan & Gordon, 1996; Grey et al., 1995) Antecedents of nonfinancial disclosure: disclosure: Test the impact of stakeholder pressure and industry-specific characteristics (Adams, 2002; Meek & Roberts, 1995) industry- Disclosure level as a proxy of CSR: CSR: Treating it as a univocal construct (see Mrgolis & Walsh, 2002 for a review) Whether and how does nonfinancial disclosure impact on firm ability to manage its stakeholder context, turning into improved corporate social performance? F. Perrini, C. Vurro 4
  • 5. Hypotheses HP 1: The higher the depth of nonfinancial disclosure by firm i at 1: time t, the higher the corporate social performance at t+1 Disclosure depth should be representative of a stronger commitment to CSR and thus be conducive to better performance HP 2: The higher the breadth of nonfinancial disclosure by firm i at time t, the higher the corporate social performance at t+1 Disclosure breadth should be representative of a higher inclusivity in the reporting process, that is, the ability to take into account and inform all process, stakeholders groups in order to effectively support dialogue • HP 3: The less homogeneous the distribution of nonfinancial 3: disclosure by firm i at time t among stakeholders, the lower the corporate social performance at t+1 • HP 4: The less homogeneous the distribution of nonfinancial 4: disclosure by firm i at time t among stakeholders, the lower the impact of disclosure breadth on corporate social performance at t+1 – Distributed reporting structures, give a signal of company willingness to integrate the structures, normative side of stakeholder theory into their accountability processes F. Perrini, C. Vurro 5
  • 6. Sample & methodology Fortune Global 100 firms included in the AccountAbility Rating between 2005 and 2007, publishing a nonfinancial report continuatively between 2004 and 2006 114 firm-year observations involving 38 firm- firms Pooled OLS regression analysis F. Perrini, C. Vurro 6
  • 7. Sample & methodology Dependent variable: CSP is the score variable: provided by AccountAbility between 2005 and 2007 Addresses largest corporations who are the most likely to publish nonfinancial reports Takes stakeholder engagement explicitly into account in assigning scores The scoring procedure is such that minimize the endogeneity bias Publicly available and released with the purpose of reaching a wider audience F. Perrini, C. Vurro 7
  • 8. Sample & methodology Independent variables: content analysis of variables: nonfinancial reports published between 2004 and 2006 Stakeholder- Stakeholder-based interrogation instrument to record the amount and typology of disclosure derived from a comparative analysis of acknowledged reporting frameworks 1. Disclosure depth: volume of disclosure by firm i at time t depth: relatively to what all the others in the sample do 2. Disclosure breadth: variety of stakeholder-related themes breadth: stakeholder- included in the nonfinancial reports released by firm i at time t 3. Disclosure concentration: gini coefficient to measure the concentration: disproportionate attention paid by firms to stakeholders F. Perrini, C. Vurro 8
  • 9. Sample & methodology In order to record the typology and amount (incidence rate) of disclosure in different categories the interrogation instrument: Constructed on a previous comparative analysis of reporting frameworks available on the market (Tencati, Perrini & Pogutz, 2004, Perrini, 2006) Stakeholders Categories Human 1.Policy for equal opportunity (female and male personnel, disability, and Resources minorities in general) 2.Development of human capital (training projects and employees’ benefits) 3.Health and safety in the workplace (beyond legal requirements) 4.Protection of workers’ right Shareholders 5.Communication and reporting activities (beyond legal requirements) 6.Corporate governance Customers 7.Product/service information and labeling (safety, life cycle assessment, certifications and labels) 8.Ethical and environmental products and services 9.Privacy protection 9 F. Perrini, C. Vurro
  • 10. Sample & methodology Suppliers 10. Supplier selection based on social and environmental criteria 11. Collaboration on cost reduction and technology 12. Procurement conditions Government 13. Internal auditing systems 14. Collaboration with local authorities 15. Taxes and duties vs. contributions received Community 16. Corporate giving 17. Active collaboration and direct contribution in the community (voluntary charity services, social solidarity, etc.) 18. Collaboration with NGOs 19. Environmental protection (energy consumption, materials and emissions) 20. Corruption prevention 10 F. Perrini, C. Vurro
  • 11. Sample & methodology Controls: Controls: Organizational affecting factors: factors: Dedicated CSR division Reporting experience Reporting standard adopted Reliance on third party audit Firm size and profitability Contextual affecting factors: factors: Industry level commitment to CSR Country- Country-effect Year- Year-effect F. Perrini, C. Vurro 11
  • 12. Results: The content of disclosure Financial highlights 89.1% Investor relations 71.7% Shareholders Corporate governance 71.7% Code of conducts and compliance Public Authorities with law 87.0% Relations with local authorities 65.2% Supplier management policy 84.8% Suppliers Environmental strategy 87.0% Environment Energy consumption, materials Market development 91.3% and emissions 73.9% Product and service information and labeling 84.8% Customers Employment policy 82.6% Customer satisfaction and Direct involvement 87.0% loyalty 71.7% Community Corporate giving 65.2% Stakeholder engagement 56.5% Health and Safety 93.5% Training 91.3% Human Resources Employment policy 82.6% Industrial relations 76.1% F. Perrini, C. Vurro 12
  • 13. Results: The performance consequences DISCLOSURE DEPTH HP 1 + Volume of disclosure by firm i at time t relatively to what all the others in the sample do Not supported DISCLOSURE BREADTH CORPORATE SOCIAL PERFORMANCE HP 2 + Variety of stakeholder-related stakeholder- Score assigned by AccountAbility themes included in the Rating to firm i at time t+1 nonfinancial reports released by (p<.01, r=.066) firm i at time t HP 4 – (p<.01) DISCLOSURE CONCENTRATION HP 3 – Gini coefficient to measure the disproportionate attention paid by firms to stakeholders (p<.01, r=-.74) r=- F. Perrini, C. Vurro 13
  • 14. Discussion A finer grained analysis of nonfinancial reporting helps clarifying how companies should structure disclosure to benefit the most from it The more does not necessarily turn into the better Though increasingly standardized, nonfinancial disclosure is still voluntary in nature, mirroring firm-specific interpretation of what CSR is firm- and how it can be shared with stakeholders and threatening volume-based volume- comparability Broadening responsibilities matters Superior performers are those able to extend their attention over a broader set of stakeholders, declining responsibilities in stakeholder- stakeholder- based areas No one should be left behind Disclosing in more stakeholder-related areas cannot lead to improved stakeholder- performance if the structure of disclosure is disproportionately in favor of some categories of stakeholders rather than homogeneously distributed Superior performers are those able to combine high engagement and balanced coverage of diversified interests F. Perrini, C. Vurro 14
  • 15. Contribution and suggestions The study provides insights on the emerging trends in the practice of nonfinancial disclosure Who and what counts for our sample of firms It empirically tests the impact of nonfinancial disclosure on performance What matter most between disclosing as more information as possible and giving an appropriate structure to disclosure It provides a further corroboration of the extent to which firms rely on disclosure to mirror what they do as opposed to how they would like to be seen Suggestions (limits…): (limits…): What is behind certain structures? Firms disclose not just through reporting Content analysis is intrinsically subjective What about small and medium sized enterprises? F. Perrini, C. Vurro 15