AAMC2019 - Integrated Reporting's 6 Capitals Scoring Index Towards Firm Financial Performance

1. Asian Academy of Management International
Conference (AAMIC) 2019
A New Integrated Reporting’s 6-Capitals Scoring Index Towards
Firm Financial Performance
Corresponding Author: Dayana Mastura Baharudin, Universiti Sains Malaysia, Penang
Co-Author : Associate Prof Dr Maran Marimuthu, Universiti Teknologi Petronas, Perak

2. PRESENTATION OUTLINE
Introduction
Problem Statement
Research Objectives and Summary of Hypotheses
Literature Review
Methodology
Significance of the study
Results, Discussion, Conclusion & Recommendations
References

3. INTRODUCTION – Evolution of Global Corporate Reporting
1960s
• Income Statement (Traditional financial statement)
• Balance Sheet (Traditional financial statement)
• 2 strands of reports within the Annual Report
1980s
• Traditional Financial Statements ; Management Commentary
• Governance & Remuneration; Environmental Report (4 strands within the Annual Report)
1997
• The Global Reporting Initiative (GRI) was formed
• Triple bottom line reporting (Economic, Social & Environmental)
2000s
• Traditional Financial Statement ; Management Commentary
• Governance & Remuneration; Sustainability Report (4 strands within the Annual Report)
2010
• The International Integrated Reporting Council (IIRC) was formed
• The integration of financial and non-financial reports (abolish the Annual Report and Sustainability Report)
• Publication of the Integrated Report <IR>
2013
• The <IR> Framework was published
• Publication of the Integrated Report <IR> based on the Framework
• 8 content elements within the Framework in which Business Model is one of the 8 elements
Rinaldi, Unerman & De Villiers (2018); Adams (2017); IIRC (2013); GRI (1997)

4. PROBLEM STATEMENT
Malaysia’s economic challenges in threefold
Ringgit lost 20% of
its values against
the US Dollar in
2014
Capital outflows
will continue
leading to further
Ringgit weakening
in July 2015
Corporations are
under greater
investor scrutiny
Investor trust has
severely eroded
Investors demand
greater corporate
transparency
Financial and Non-
Financial must be
Integrated. Annual
Reports and
Sustainability
Reports are out of
date
The Integrated
Report <IR> is a
tool to overcome
transparency
issues
Bank Negara Malaysia (2018); Kaye (2018); Chung & Ong (2017); Saleem (2015); IIRC (2013); Wong & Goh (2011)

5. PROBLEM STATEMENT – CON’T
Lack of transparency
within corporate
Malaysia – focus on the
888 PLCs within Bursa
Malaysia
Foreign
capital
outflow &
impacted the
Ringgit
Lowered
foreign investor
confidence in
Malaysia
South Africa restructured
their Corporate Reporting
& CG in 1994 after the
freedom from the
apartheid
South Africa is
the global
trailblazer in
<IR> since 2011
The
Johannesburg
Stock Exchange
made the <IR> as
part of listing
rules
Only 50 out of 888
Malaysian PLCs
published the <IR> in
2015
Annual
Report’s One
Capital which
is the Share
Capital
Integrated
Report’s 6
capitals
implementation
– 5.63% (50 out
of 888 PLCs)
Abdullah, Mat Husin, Mohamad Salleh & Alrazi (2018) ; Luk & Yap (2017); ACCA & MIA (2016); Bloomberg (2016); PwC (2015); Clayton
et al (2015)

6. RESEARCH OBJECTIVES AND HYPOTHESES
RO1: To examine the
disclosure level of the
Integrated Report’s 6
capitals practices and the
related practices of having
Women Board of Directors
across the Malaysian oil
and gas PLCs
RO2: To investigate the impact
of the disclosure extent of the
Integrated Report’s 6 capitals
on the financial performance
of the Malaysian oil and gas
PLCs
H1: The publication of the
Integrated Reporting’s 6
Capitals will have a significant
positive impact on firm
performance
RO3: To investigate if the
moderating role of the Woman
Board of Directors positively
affects the relationship between
Integrated Reports 6 capitals and
the financial performance of the
Malaysian oil and gas PLCs
H2: The Woman Board of
Directors has a positive
significant moderating
effect on the relationship
between Integrated
Reporting’s 6 Capitals and
firm performance

7. LITERATURE REVIEW
<IR> 6 CAPITALS
•The pool of funds that is available to an organisation for use in the
production of goods or the provision of services obtained through
financing or generated through operations or investments.
Financial Capital
• Manufactured physical objects that are available to an
organisation for use in the production of goods or the
provision of services.
Manufactured Capital
• Organisational, knowledge-based intangibles
Intellectual Capital
• People’s competencies, capabilities and experience, and their motivations to
innovate.
Human Capital
• The institutions and relationships established within and between each
community, group of stakeholders and other networks (and an ability to share
information) to enhance individual and collective well-being
Social and Relationship
Capital
Natural Capital
• All renewable and non-renewable environmental stocks that
provide goods and services that support the current and future
prosperity of an organisation

8. LITERATURE REVIEW – CON’T
Summary of the Theoretical Framework
Underpinning Theory Lens Theory
 Dependent + Independent Variables  Moderating Variable + Dependent Variables
 Business Model + Firm Performance
 Stakeholder’s Theory
Edward Freeman (1984)
 Abdullah, Mat Husin, Mohamad Salleh & Alrazi (2018)
; Frias – Aceituno, Rodriguez-Ariza & Garcia-Sanchez
(2013); Adams, Fries and Simnet (2011)
 Women Board of Directors + Firm Performance
 Agency Theory
Jensen & Meckling (1976)
 Securities Commission Malaysia (2017); Clayton,
Rogerson and Rampedi (2012); Blowfield and Murray
(2011); Jonikas (2013); IoDSA (2009) ; SAICA (2012) ;
MIA and ACCA (2016)
 Luk and Yap (2017); Lobo and Zhou (2001) ; Shehata
(2014) ; Ağca & Önder (2007) ; Owusu-Ansah (1998) ;
Gaa (2010) ; Abeysekera (2008)

9. RESEARCH FRAMEWORK
Independent variables: Dependent variable:
Integrated Report 6 capitals Firm performance
IV1 Financial Capital
IV2 Manufactured Capital Shareholder's perspective (External)
Stakeholder theory Return on Equity (ROE)
IV3 Intellectual Capital H1
IV4 Human Capital
Management's perspective (Internal)
IV5 Social and Relationship Capital Return on Assets (ROA)
Agency
IV6 Natural Capital Theory H2
Controlled Variables
Firm Size
Firm Age
Moderating Variable (MoV)
Woman
Board of
Directors
(WBOD)

10. RESEARCH METHODOLOGY
Sampling and
Population
- Population data
•- Unit of analysis (PLCs)
•- Non-probability purposive sampling method of 34 oil and
gas companies
Data Collection
- Secondary data
- Panel data (collected from Annual Reports / Integrated
Reports)
- 5 years data (2013 – 2017)
- Weighted content analysis (A new scoring system based
on the 6-capitals scoring index)
Model development,
Hypotheses
development,
statistical testing and
software
- Proposed a new scoring system for the <IR>
- Hypotheses development
- Panel data analysis
- Descriptive statistics and correlation analysis
- Pooled OLS regression
- - STATA

11. A NEW <IR> 6 CAPITALS SCORING INDEX
Financial Capital (11 items) Manufactured Capital (12 items) Intellectual Capital (13 items)
*Short-term debt *Owner-occupied buildings * Patents
*Long-term debt *Investment property: buildings * Copyrights
*Reserves *Leased buildings * Software
*Share capital *Owner occupied warehouse * Rights
*Share premium *Investment property: warehouse * Licences
*General reserves *Leased warehouse * Tacit knowledge
*Special purpose reserve *Owner occupied property, plant & equipment * Systems
*Asset replacement reserve *Investment property: property, plant & equipment *Procedures
*Industry grants *Leased property, plant & equipment * Protocols
*Government grants *Production equipment and tools: owned * Knowledge transfer
*Local authority grants *Production equipment and tools: leased * Brand
* Infrastructure (such as roads, ports, bridges and waste
and water treatment plants) * Reputation
*Goodwill
Human Capital (18 items) Social and Relationship Capital (15 items) Natural Capital (14 items)
*Learning and development * Shared norms *Air
*Career pathway * Common values and behaviours *Water
* Certification * Key relationships with stakeholders * Land
* Human rights * An organisation's social license to operate * Forests
* Understand, develop, and implement an
organisational strategy *Community association * Materials
*Process improvements * Community watchdog *Minerals
* Leadership skills * Market share * Energy
*Managerial skills * Customer lists and contacts * Biodiversity
*Collaboration skills * Anti-corruption * Ecosystem health
* Reduction of employee turnover * Anti-competitive behaviour * Emissions
* Labour and management relations *Customer health and safety *Effluents
* Occupational health and safety * Customer privacy *Waste
* Diversity * Non-discrimination *Oil reservoirs
* Equal opportunity *Freedom of association
*Renewable energy from solar systems and
hydroelectric dam
* Talent pipeline from universities (local and
abroad) *Indigenous rights
*Top management talent pipeline (from
internal staff)
*Joint venture between industry and
universities

12. METHODOLOGY – OPERATIONALIZATION OF VARIABLES
Dimension Variable Symbol Formula/Source
6 Capitals
(Independent)
1. Financial Capital
2. Manufactured
Capital
3. Intellectual
Capital
4. Human Capital
5. Social and
Relationship Capital
6. Natural Capital
FINCAP
MANCAP
INTCAP
HUMCAP
SOCRELCAP
NATCAP
New scoring system of
0,1,2,3,4…
Firm
Performance
(Dependent)
Shareholders
Perspective ROE
Net profit / Shareholders
equity
Firm
Performance
(Dependent)
Management's
Perspective ROA
Net operating profit / Total
Assets
UNSDG No.5
(Moderating)
Women Board of
Directors WBOD
One women director = 1
All men directors = 0
SIZE
(Controlled) Firm Size SIZE Log of total assets
AGE
(Controlled) Firm Age AGE
Number of years listed on
Bursa Malaysia

13. RESEARCH MODELS
Model 1:
ROE = β0 + β1FINCAP + β2MANCAP + β3INTCAP + β4HUMCAP + β5SOCRELCAP + β6NATCAP + β7AGE +
β8SIZE + εit
Model 2:
ROA = β0 + β1FINCAP + β2MANCAP + β3INTCAP + β4HUMCAP + β5SOCRELCAP + β6NATCAP + β7AGE +
β8SIZE + εit
Model 3:
ROE = β0 + β1FINCAP + β2MANCAP + β3INTCAP + β4HUMCAP + β5SOCRELCAP + β6NATCAP +
(β7FINCAP * WBOD) + (β8MANCAP * WBOD) + (β9INTCAP * WBOD) + (β10HUMCAP * WBOD) +
(β11SOCRELCAP * WBOD) + (β12NATCAP * WBOD) + β13AGE + β14SIZE + εit
Model 4:
ROA = β0 + β1FINCAP + β2MANCAP + β3INTCAP + β4HUMCAP + β5SOCRELCAP + β6NATCAP +
(β7FINCAP * WBOD) + (β8MANCAP * WBOD) + (β9INTCAP * WBOD) + (β10HUMCAP * WBOD) +
(β11SOCRELCAP * WBOD) + (β12NATCAP * WBOD) + β13AGE + β14SIZE + εit

14. SIGNIFICANCE OF THE STUDY
Theoretical
• Stakeholder theory –
a stakeholder
oriented corporate
report focusing on
the disclosure of the
6 CAPITALS
• Agency theory – The
agency theory posits
that conflicts
between managers
and shareholders can
be reduced through
the disclosure of the
6 CAPITALS
Methodological
• A new scoring system
for the evaluating the
disclosure level of the
6 CAPITALS.
Practical
• The preparers of the
Integrated Report
within the PLCs may
use the new scoring
system to evaluate
their disclosure level

15. RESULTS & DISCUSSION
• The mean of ROA is positive is due to the fact that the publication of the <IR> 6 capitals are positively
increasing the internal management’s value.
• On the other hand, the mean of ROE is negative is due to the fact that the <IR> 6 capitals are negatively
increasing the external shareholders value.
• The financial capital and manufactured capital components are the most reported and disclosed capitals as per
the International Integrated Reporting Framework (<IR>) which were classified as Share Capital and Non-
Current Assets in the Annual Report framework.
• Therefore, these two capitals are common in the Annual Report era and are just re-classified as capitals in the
Integrated Reporting era.
• The other 4 new categories of capitals, which are human capital, intellectual capital, social and relationship
capital and natural capital which are introduced within the <IR> era was not disclosed extensively by the oil and
gas PLCs in which explains the minimum to be 0 and the maximum disclosed is a small amount.
• Level of disclosures/practices of the 6 capitals are low over 5 years
• Frequency of disclosures of the 6 capitals are also low over 5 years.
• Results of Pooled Ordinary Least Squares for ROE and ROA are insignificant as across all the 33 O&G companies
have not prepared the <IR> and 6 capitals disclosures. Data on have been obtained form the Annual Reports.
• Results of Pooled Ordinary Least Squares for ROE and ROA after the moderation effect of the Women Board of
Directors are also insignificant as the Malaysian O&G industry are highly dependent on male directors and
expertise.

16. CONCLUSION & RECOMMENDATION
• The most common capitals to report and disclose within the Annual Reports are the Financial Capital and the
Manufactured Capital. Natural Capital is the most difficult capital to report on. The three human related capitals
which are also known as the tripartite human related capitals which consists of the Human Capital, Intellectual Capital
and Social and Relationship Capital are not disclosed much as well in the Annual Report.
• This shows that hypotheses 1 is rejected as the publication of the <IR> 6 capitals has an insignificant impact on firm
performance which is coupled with the fact that the level of transparency of the 6-capitals disclosure items amongst
the Malaysian oil and gas PLCs are still at its infancy and could be detrimental when dealing with global stakeholders
with the current low level of transparency in which the oil and gas industry are always exposed to the international
stakeholders and shareholders in the normal course of day to day business.
• The development of Integrated Reporting is designed to enhance and consolidate existing reporting practices and,
through collaboration, consultation and experimentation, to move towards a reporting framework that provides the
information needed to assess organizational value in the 21st century.
• Hypotheses 2 is rejected as Woman Board of Directors has an insignificant moderating effect on the relationship
between <IR> 6 capitals and firm performance. This is evidenced by the lack of women on the boards across the 33 oil
and gas PLCs as the oil and gas industry is seen as the playing field for the male and not the female.
• The Malaysian oil and gas PLCs would need to improve in the disclosure practices of the 6-capitals within the
Integrated Report and to replace the Annual Report and Sustainability Reports with the ‘One Report’ which is another
name for the Integrated Report in order to be at the same level of global practices amongst the global MNCs as
recommended by the IIRC.

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18. THANK YOU